tit" 


THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


HENDERSON'S 

WAR    TAX    GUIDE 

ACT  OF  OCTOBER  3,  1917 


WITH 


NOTES  AND  COMMENTARIES 


ANNOTATED  BY 


ELIAS  H.  HENDERSON,  PK.  B.,  J.  D. 


Author  of 

'1917  War  Reoenue  and  Income  Tax  Guide" 
"Federal  Antitrust  Laws" 
"Federal  Legislation"  and 
"Income  Tax  Puzzles" 


FIRST  EDITION 


T 
H3 

19  iT 


Copyright,  1917 

BY  ELIAS   H.   HENDERSON 


PREFACE 


This  book  covers  the  War  Tax  Act  of  October  3,  1917,  an- 
notated with  those  sections  of  the  Income  Tax  Act  of  September 
8,  1916,  which  are  referred  to,  amended  or  repealed  thereby. 

Following  the  statute  are  all  of  the  Treasury  decisions,  opin- 
ions, and  court  decisions,  in  alphabetical  order,  pertaining  to  the 
Act  of  1917,  which  have  been  rendered  since  the  publication  of 
the  author's  previous  work  on  this  subject,  "Federal  Legislation" 
January  1,  1915. 

The  Federal  Government  obtains  revenue  from  the  tariff, 
excise,  income,  profits  and  inheritance  taxes.  Due  to  economical 
changes,  the  amount  obtainable  from  internal  revenue  is  not  ade- 
quate to  support  the  Government.  In  view  of  our  foreign  relations 
the  tariff  on  imports  is  impractical.  Hence  the  necessary  funds  to 
defray  the  expenses  of  the  Government  must  be  derived  almost 
exclusively  from  tax  on  income,  profits  and  estates.  In  the  past, 
the  interpretation  of  these  laws  has  been  delegated  to  the  Com- 
missioner of  Internal  Revenue. 

A  "Federal  Tax  Commission"  should  be  created  immediately 
in  order  to  assist  in  the  proper  administration  of  the  Federal  Tax 
Laws.  The  time  has  now  arrived  when  the  tax  payer  is  entitled 
to  have  a  hearing  before  a  competent  tribunal  on  the  difficult  ques- 
tions arising  daily  under  these  laws.  Arbitrary  ruling  and  judicial 
legislation  by  administrative  officials  is  contrary  to  the  fundamental 
principles  from  which  the  nation  derives  the  right  to  tax  the  people. 

Chicago,  Illinois,  U.  S.  A. 
November  15,  1917. 


CH I C  AGO 


1917  WAR  TAX  LAW 


An  Act  to  Provide  Revenue  to  Defray  War  Expenses  and  for 

Other  Purposes. 


Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  Assembled. 


TITLE  I.    WAR  INCOME  TAX 
Individual  Normal  Tax 


Section  1.  That  in  addition  to  the  normal  tax  imposed  by 
subdivision  (a)  of  section  one  of  the  Act  entitled  "An  Act  to 
increase  the  revenue,  and  for  other  purposes,"  approved  Septem- 
ber eight,  nineteen  hundred  and  sixteen : 1 

There  shall  be  levied,  assessed,  collected,  and  paid  a  like 
normal  tax  of  two  per  centum  upon  the  income  of  every  indi- 
vidual, a  citizen  or  resident  of  the  United  States,  received  in  the 
calendar  year  nineteen  hundred  and  seventeen  and  every  cal- 
endar year  thereafter. 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  I  (a)  That  there  shall 
be  levied,  assessed,  collected,  and  paid  annually  upon  the  entire  net 
income  received  in  the  preceding  calendar  year  from  all  sources  by  every 
individual,  a  citizen  or  resident  of  the  United  States,  a  tax  of  two  per 
centum  upon  such  income;  and  a  like  tax  shall  be  levied,  assessed, 
collected  and  paid  annually  upon  the  entire  net  income  received  in 
the  preceding  calendar  year  from  all  sources  within  the  United  States 
by  every  individual,  a  non-resident  alien,  including  interest  on  bonds, 
notes,  or  other  interest-bearing  obligations  of  residents,  corporate  or 
otherwise. 


THE   FEDERAL  WAR  TAX  LAW,   1917 


INDIVIDUAL  SUR-TAX 

Section  2.  That  in  addition  to  the  additional  tax  imposed  by 
subdivision  (b)  of  section  one  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen  i1 

There  shall  be  levied,  assessed,  collected  and  paid  a  like 
additional  tax  upon  the  income  of  every  individual  received  in 
the  calendar  year  nineteen  hundred  and  seventeen  and  every 
calendar  year  thereafter,  as  follows: 

2(ACT  OF  SEPTEMBER  8,  1916.) 

Section  I  (b)  In  addition  to  the  income  tax  imposed  by  sub- 
division (a)  of  this  section  (herein  referred  to  as  the  normal  tax)  there 
shall  be  levied,  assessed,  collected,  and  paid  upon  the  total  net  income 
of  every  individual,  or,  in  the  case  of  a  non-resident  alien,  the  total 
net  income  received  from  all  sources  within  the  United  States,  an  addi- 
tional income  tax  (herein  referred  to  as  the  additional  tax)  of  one  pet 
centum  per  annum  upon  the  amount  by  which  such  total  net  income 
exceeds  $20,000  and  does  not  exceed  $40,000,  two  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds  $40,000  and 
does  not  exceed  $60,000,  three  per  centum  per  annum  upon  the  amount 
by  which  such  total  net  income  exceeds  $60,000,  and  does  not  exceed 
$80,000,  four  per  centum  per  annum  upon  the  amount  by  which  such 
total  net  income  exceeds  $80,000  and  does  not  exceed  $100,000,  five  per 
centum  per  annum  upon  the  amount  by  which  such  total  net  income 
exceeds  $100,000  and  does  not  exceed  $150,000,  six  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds  $150,000  and 
does  not  exceed  $200,000,  seven  per  centum  per  annum  upon  the  amount 
by  which  such  total  net  income  exceeds  $200,000  and  does  not  exceed 
$250,000,  eight  per  centum  per  annum  upon  the  amount  by  which  such 
total  net  income  exceeds  $250,000  and  does  not  exceed  $300,000,  nine 
per  centum  per  annum  upon  the  amount  by  which  such  total  net  income 
exceeds  $300,000  and  does  not  exceed  $500,000,  ten  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds  $500,000,  and 
does  not  exceed  $1,000,000,  eleven  per  centum  per  annum  upon  the  amount 
by  which  such  total  net  income  exceeds  $1,000,000  and  does  not  exceed 
$1,500,000,  twelve  per  centum  per  annum  upon  the  amount  by  which  such 
total  net  income  exceeds  $1,500,000  and  does  not  exceed  $2,000,000,  and 
thirteen  per  centum  per  annum  upon  the  amount  by  which  such  total 
net  income  exceeds  $2,000,000. 

For  the  purpose  of  the  additional  tax  there  shall  be  included  as 
income  the  income  derived  from  dividends  on  the  capital  stock  or  from 
the  net  earnings  of  any  corporation,  joint-stock  company  or  association, 
or  insurance  company,  except  that  in  the  case  of  non-resident  aliens 
such  income  derived  from  sources  without  the  United  States  shall  not 
be  included. 

All  the  provisions  of  this  title  relating  to  the  normal  tax  on  in- 
dividuals, so  far  as  they  are  applicable  and  are  not  inconsistent  with 
this  subdivision  and  section  three,  shall  apply  to  the  imposition,  levy, 
assessment,  and  collection  of  the  additional  tax  imposed  under  this 
subdivision. 


One  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $5,000  and  does  not  exceed  $7,500; 

Two  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $7,500  and  does  not  exceed  $10,000 ; 

-Three  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $10,000  and  does  not  exceed  $12,500; 

Four  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $12,500  and  does  not  exceed  $15,000; 

Five  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $15,000  and  does  not  exceed  $20,000; 

Seven  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $20,000  and  does  not  exceed  $40,000; 

Ten  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $40,000  and  does  not  exceed  $60,000; 

Fourteen  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $60,000  and  does  not  exceed  $80,000 ; 

Eighteen  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $80,000  and  does  not  exceed  $100,000 ; 

Twenty-two  per  centum  per  annum  upon  the  amount  by 
which  the  total  net  income  exceeds  $100,000  and  does  not  ex- 
ceed $150,000; 

Twenty-five  per  centum  per  annum  upon  the  amount  by 
which  the  total  net  income  exceeds  $150,000  and  does  not  ex- 
ceed $200,000; 

Thirty  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $200,000  and  does  not  exceed 
$250,000; 

Thirty-four  per  centum  per  annum  upon  the  amount  by 
which  the  total  net  income  exceeds  $250,000  and  does  not  ex- 
ceed $300,000; 

Thirty-seven  per  centum  per  annum  upon  the  amount  by 
which  the  total  net  income  exceeds  $300,000  and  does  not  ex- 
ceed $500,000; 

Forty  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $500,000  and  does  not  exceed 
$750,000; 

Forty-five  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $750,000  and  does  not  exceed 
$1,000,000; 

Fifty  per  centum  per  annum  upon  the  amount  by  which  the 
total  income  exceeds  $1,000,000. 


THE  FEDERAL  WAR  TAX  LAW,   1917 


Individual  Exemptions 


Section  3.  That  the  taxes  imposed  by  sections  one  and  two 
of  this  Act  shall  be  computed,  levied,  assessed,  collected,  and 
paid  upon  the  same  basis  and  in  the  same  manner  as  the  similar 
taxes  imposed  by  section  one  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen  i1 

Except  that  in  the  case  of  the  tax  imposed  by  section  one  of 
this  Act  (a)  the  exemptions  of  $3,000  and  $4,000  provided  in 
section  seven  of  such  Act  of  September  eighth,  nineteen  hundred 
and  sixteen  :2 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  1  (b)  For  the  pur- 
pose of  the  additional  tax  there  shall  be  included  as  income  the  income 
derived  from  dividends  on  the  capital  stock  or  from  the  net  earnings  of 
any  corporation,  joint-stock  company  or  association,  or  insurance  com- 
pany, except  that  in  the  case  of  non-resident  aliens  such  income  derived 
from  sources  without  the  United  States  shall  not  be  included. 

All  the  provisions  of  this  title  relating  to  the  normal  tax  on  in- 
dividuals, so  far  as  they  are  applicable  and  are  not  inconsistent  with 
this  subdivision  and  section  three,  shall  apply  to  the  imposition,  levy, 
assessment,  and  collection  of  the  additional  tax  imposed  upon  this  sub- 
division. 

(c)  The  foregoing  normal  and  additional  tax  rates  shall  apply  to 
the  entire  net  income,  except  as  hereinafter  provided,  received  by  every 
vaxable  person  in  the  calendar  year  nineteen  hundred  and  sixteen  ana 
in  each  calendar  year  thereafter. 

"(ACT  OF  SEPTEMBER  8th,  1916)  Section  7  (a)  That  for  the 
purpose  of  the  normal  tax  only,  there  shall  be  allowed  as  an  exemption 
in  the  nature  of  a  deduction  from  the  amount  of  the  net  income  of  each 
af  said  persons,  ascertained  as  provided  herein,  the  sum  of  $3,000.  plus 
$1,000  additional  if  the  person  making  the  return  be  a  head  of  a  family 
/>r  a  married  man  with  a  wife  living  with  him,  or  plus  the  sum  of  $1,000 
additional  if  the  person  making  the  return  be  a  married  woman  with  a 
husband  living  with  her;  but  in  no  event  shall  this  additional  exemption 
of  $1,000  be  deducted  by  both  a  husband  and  a  wife:  Provided,  That 
only  one  deduction  of  $4,000  shall  be  made  from  the  aggregate  income 
of  both  husband  and  wife  when  living  together:  Provided  further,  That 
guardians  or  trustees  shall  be  allowed  to  make  this  personal  exemption 
as  to  income  derived  from  the  property  of  which  such  guardian  or 
trustee  has  charge  in  favor  of  each  ward  or  cestui  que  trust:  Provided 
further,  That  in  no  event  shall  a  ward  or  cestui  que  trust  be  allowed  a 
greater  personal  exemption  than  $3,000,  or,  if  married,  $4,000,  as  pro- 
vided in  this  paragraph,  from  the  amount  of  net  income  received  from 
all  sources.  There  shall  also  be  allowed  an  exemption  from  the  amount 
of  the  net  income  of  estates  of  deceased  persons  during  the  period  of 
administration  or  settlement,  and  of  trust  or  other  estates  the  income 
of  which  is  not  distributed  annually  or  regularly  under  the  provisions 
of  paragraph  (b),  section  two,  the  sum  of  $3,000,  including  such  deduc- 
tions as  are  allowed  under  section  five. 


THE  FEDERAL  WAR  TAX  LAW,   1917  9 

As  amended  by  this  Act  shall  be  respectively  $1,000  and 
$2,000,  and  (b)  the  returns  required  under  subdivisions  (b)  and 
(c)  of  section  eight  of  such  Act  :l 

As  amended  by  this  Act  shall  be  required  in  the  case  if 
net  income  of  $1,000  or  over,  in  the  case  of  unmarried  persons, 
and  $2,000  or  over  in  the  case  of  married  persons,  instead  of 
$3,000  or  over,  as  therein  provided,  and  (c)  the  provisions  of  sub- 
division (c)  of  section  nine  of  such  Act:2 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  8  (b)  On  or  before 
the  first  day  of  March,  nineteen  hundred  and  seventeen,  and  the  first 
day  of  March  in  each  year  thereafter,  a  true  and  accurate  return  under 
oath  shall  be  made  by  each  person  of  lawful  age,  except  as  hereinafter 
provided,  having  a  net  income  of  $3,000  or  over  for  the  taxable  year 
to  the  collector  of  internal  revenue  for  the  district  in  which  such  person 
has  his  legal  residence  or  principal  place  of  business,  or  if  there  be  no 
legal  residence  or  place  of  business  in  the  United  States,  then  with  the 
collector  of  internal  revenue  at  Baltimore,  Maryland,  in  such  form  as 
the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  shall  prescribe,  setting  forth  specifically  the  gross 
amount  of  income  from  all  separate  sources,  and  from  the  total  thereof 
deducting  the  aggregate  items  of  allowances  herein  authorized:  Pro- 
vided, That  the  Commissioner  of  Internal  Revenue  shall  have  authority 
to  grant  a  reasonable  extension  of  time,  in  meritorious  cases,  for 
filing  returns  of  income  by  persons  residing  or  traveling  abroad  who 
are  required  to  make  and  file  returns  of  income  and  who  are  unable 
to  file  said  returns  on  or  before  March  first  of  each  year:  Provided 
further,  That  the  aforesaid  return  may  be  made  by  an  agent  when  by 
reason  of  illness,  absence,  or  nonresidence  the  person  liable  for  said 
return  is  unable  to  make  and  render  the  same,  the  agent,  assuming 
the  responsibility  of  making  the  return  and  incurring  penalties  provided 
for  erroneous,  false,  or  fraudulent  return. 

(c)  Guardians,  trustees,  executors,  administrators,  receivers,  con- 
servators, and  all  persons,  corporations,  or  associations  acting  in  any 
fiduciary  capacity,  shall  make  and  render  a  return  of  the  income  of  the 
person,  trust,  or  estate  for  whom  or  which  they  act,  and  be  subject  to 
all  the  provisions  of  this  title  which  apply  to  individuals.  Such  fiduciary 
shall  make  oath  that  he  has  sufficient  knowledge  of  the  affairs  of  such 
person,  trust  or  estate  to  enable  him  to  make  such  return  and  that  the 
same  is,  to  the  best  of  his  knowledge  and  belief,  true  and  correct,  and 
be  subject  to  all  the  provisions  of  this  title  which  apply  to  individuals: 
Provided,  That  a  return  made  by  one  of  two  or  more  joint  fiduciaries 
filed  in  the  district  where  such  fiduciary  resides,  under  such  regulations 
as  the  Secretary  of  the  Treasury  may  prescribe,  shall  be  a  sufficient 
compliance  with  the  requirements  of  this  paragraph. 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  9  (c)  The  amount 
of  the  normal  tax  hereinbefore  imposed  shall  be  deducted  and  withheld 
from  fixed  or  determinable  annual  or  periodical  gains,  profits,  and  in- 
come derived  from  interest  upon  bonds  and  mortgages,  or  deeds  of 
trust  or  other  similar  obligations  of  corporations,  joint-stock  companies, 
associations,  and  insurance  companies,  whether  payable  annually  or  at 
shorter  or  longer  periods,  although  such  interest  does  not  amount  to 
$3,000,  subject  to  the  provisions  of  this  title  requiring  the  tax  to  be 
withheld  at  the  source  and  deducted  from  annual  income  and  returned 
and  paid  to  the  Government. 


10  THE  FEDERAL  WAR  TAX  LAW,   1917 

As  amended  by  this  Act,  requiring  the  normal  tax  of  in- 
dividuals on  income  derived  from  interest  to  be  deducted  -and 
withheld  at  the  source  of  the  income  shall  not  apply  to  the  new 
two  per  centum  normal  tax  prescribed  in  section  one  of  this  Act 
until  on  and  after  January  first,  nineteen  hundred  and  eighteen, 
and  thereafter  only  one  two  per  centum  normal  tax  shall  be 
deducted  and  withheld  at  the  source  under  the  provisions  of 
such  subdivision  (c),  and  any  further  normal  tax  for  which  the 
recipient  of  such  income  is  liable  under  this  Act  or  such  Act  of 
September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by 
this  Act,  shall  be  paid  by  such  recipient. 

Computation  of  Income  Tax 

Section  4.  That  in  addition  to  the  tax  imposed  by  subdivision 
(a)  of  section  ten  of  such  Act  of  September  eighth,  nineteen 
hundred  and  sixteen  :* 

'Section  10.  That  there  shall  be  levied,  assessed,  collected,  and  paid 
annually  upon  the  total  net  income  received  in  the  preceding  calendar 
year  from  all  sources  by  every  corporation,  joint-stock  company  or 
association,  or  insurance  company,  organized  in  the  United  States,  no 
matter  how  created  or  organized  but  not  including  partnerships,  a  tax 
of  two  per  centum  upon  such  income;  and  a  like  tax  shall  be  levied, 
assessed,  collected,  and  paid  annually  upon  the  total  net  income  received 
in  the  preceding  calendar  year  from  all  sources  within  the  United  States 
by  every  corporation,  joint-stock  company,  or  association,  or  insurance 
company  organized,  authorized,  or  existing  under  the  laws  of  any  foreign 
country,  including  interest  on  bonds,  notes,  or  other  interest-bearing 
obligation  of  residents,  corporate  or  otherwise,  and  including  the  income 
derived  from  dividends  on  capital  stock  or  from  net  earnings  of  resident 
corporations,  joint-stock  companies  or  associations,  or  insurance  com- 
panies whose  net  income  is  taxable  under  this  title:  Provided,  That  the 
term  "dividends"  as  used  in  this  title  shall  be  held  to  mean  any  dis- 
tribution made  or  ordered  to  be  made  by  a  corporation,  joint-stock 
company,  association,  or  insurance  company,  out  of  its  earnings  or 
profits  accrued  since  March  first,  nineteen  hundred  and  thirteen,  and 
payable  to  its  shareholders,  whether  in  cash  or  in  stock  of  the  corpora- 
tion, joint-stock  company,  association,  or  insurance  company,  which 
stock  dividend  shall  be  considered  income,  to  the  amount  of  its  cash 
value. 

The  foregoing  tax  rate  shall  apply  to  the  total  net  income  received 
by  every  taxable  corporation,  joint-stock  company  or  association,  or 
insurance  company  in  the  calendar  year  nineteen  hundred  and  sixteen 
and  in  each  year  thereafter,  except  that  if  it  has  fixed  its  own  fiscal  year 
under  the  provisions  of  existing  law,  the  foregoing  rate  shall  apply  to 
the  proportion  of  the  total  net  income  returned  for  the  fiscal  year  ending 
prior  to  December  thirty-first,  nineteen  hundred  and  sixteen,  which  the 
period  between  January  first,  nineteen  hundred  and  sixteen,  and  the 
end  of  such  fiscal  year  bears  to  the  whole  of  such  fiscal  year,  and  the 
rate  fixed  in  Section  II  of  the  Act  approved  October  third,  nineteen 
hundred  and  thirteen,  entitled  "An  Act  to  reduce  tariff  duties  and  to 
provide  revenue  for  the  Government,  and  for  other  purposes,"  shall 
apply  to  the  remaining  portion  of  the  total  net  income  returned  for 
such  fiscal  year. 

For  the  purpose  of  ascertaining  the  gain  derived  or  loss  sustained 
from  the  sale  or  other  disposition  by  a  corporation,  joint-stock  company, 
or  association,  or  insurance  company,  of  property,  real,  personal,  or 


.THE  FEDERAL  WAR  TAX   LAW,   1917  11 

As  amended  by  this  Act,  there  shall  be  levied,  assessed, 
collected  and  paid  a  like  tax  of  four  per  centum  upon  the  in- 
come received  in  the  calendar  year  nineteen  hundred  and  seven- 
teen and  every  calendar  year  thereafter,  by  every  corporation, 
joint-stock  company  or  association,  or  insurance  company,  sub- 
ject to  the  tax  imposed  by  that  subdivision  of  that  section, 
except  that  if  it  has  fixed  its  own  fiscal  year,  the  tax  imposed  by 
this  section  for  the  fiscal  year  ending  during  the  calendar  year 
nineteen  hundred  and  seventeen  shall  be  levied,  assessed,  col- 
lected, and  paid  only  on  that  proportion  of  its  income  for  such 
fiscal  year  which  the  period  between  January  first,  nineteen  hun- 
dred and  seventeen,  and  the  end  of  such  fiscal  year  bears  to  the 
whole  of  such  fiscal  year. 

Computation  of  Income  Tax 

The  tax  imposed  by  this  section  shall  be  computed,  levied, 
assessed,  collected,  and  paid  upon  the  same  incomes  and  in 
the  same  manner  as  the  tax  imposed  by  subdivision  (a)  of  sec- 
tion ten  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen:  (See  Sec.  4,  page  10  note.) 

As  amended  by  this  Act,  except  that  for  the  purpose  of  the 
tax  imposed  by  this  section  the  income  embraced  in  a  return 
of  a  corporation,  joint-stock  company  or  association,  or  in- 
surance company,  shall  be  credited  with  the  amount  received 
as  dividends  upon  the  stock  or  from  the  net  earnings  of  any 
other  corporation,  joint-stock  company  or  association,  or  insur- 
ance company,  which  is  taxable  upon  its  net  income  as  provided 
in  this  title. 

Territory  Exempt 

Section  5.  That  the  provisions  of  this  title  shall  not  extend 
to  Porto  Rico  or  the  Philippine  Islands,  and  the  Porto  Rican  or 
Philippine  Legislature  shall  have  power  by  due  enactment  to 
amend,  alter,  modify,  or  repeal  the  income  tax  laws  in  force  in 
Porto  Rico  or  the  Philippine  Islands,  respectively. 

TITLE  II.    WAR  EXCESS  PROFITS  TAX 
Terms  Defined 

Section  200.    That  when  used  in  this  title : 

The  term  "corporation"  includes  joint-stock  companies  or 
associations  and  insurance  companies; 

The  term  "domestic"  means  created  under  the  law  of  the 
United  States,  or  of  any  State,  Territory,  or  District  thereof, 
and  the  term  "foreign"  means  created  under  the  law  of  any  other 
possession  of  the  United  States  or  of  any  foreign  country  or 
government ; 

mixed,  acquired  before  March  first,  nineteen  hundred  and  thirteen,  the 
fair  market  price  or  value  of  such  property  as  of  March  first,  nineteen 
hundred  and  thirteen,  shall  be  the  basis  for  determining  the  amount  of 
such  gain  derived  or  loss  sustained. 


12  THE  FEDERAL  WAR  TAX  LAW,   1917 

The  term  "United  States"  means  only  the  States,  the  Terri- 
tories of  Alaska  and  Hawaii,  and  the  District  of  Columbia ; 

The  term  "taxable  year"  means  the  twelve  months  ending 
December  thirty-first,  excepting  in  the  case  of  a  corporation  or 
partnership  which  has  fixed  its  own  fiscal  year,  in  which  case 
it  means  such  fiscal  year.  The  first  taxable  year  shall  be  the 
year  ending  December  thirty-first,  nineteen  hundred  and  seven- 
teen, except  that  in  the  case  of  a  corporation  or  partnership  which 
has  fixed  its  own  fiscal  year,  it  shall  be  the  fiscal  year  ending 
during  the  calendar  year  nineteen  hundred  and  seventeen.  If 
a  corporation  or  partnership,  prior  to  March  first,  nineteen  hun- 
dred and  eighteen,  makes  a  return  covering  its  own  fiscal  year, 
and  includes  therein  the  income  received  during  that  part  of  the 
fiscal  year  falling  within  the  calendar  year  nineteen  hundred 
and  sixteen,  the  tax  for  such  taxable  year  shall  be  that  propor- 
tion of  the  tax  computed  upon  the  net  income  during  such  full 
fiscal  year  which  the  time  from  January  first,  nineteen  hundred 
and  seventeen,  to  the  end  of  such  fiscal  year  bears  to  the  full 
fiscal  year ;  and 

The  term  "prewar  period"  means  the  calendar  year  nineteen 
hundred  and  eleven,  nineteen  hundred  and  twelve,  and  nineteen 
hundred  and  thirteen,  or,  if  a  corporation  or  partnership  was 
not  in  existence  or  an  individual  was  not  engaged  in  a  trade 
or  business  during  the  whole  of  such  period,  then  as  many  of 
such  years  during  the  whole  of  which  the  corporation  or  partner- 
ship was  in  existence  or  the  individual  was  engaged  in  the  trade 
or  business. 

The  terms  "trade"  and  "business"  include  professions  and 
occupations. 

The  term  "net  income"  means  in  the  case  of  a  foreign  cor- 
poration or  partnership  or  a  non-resident  alien  individual,  the 
net  income  received  from  sources  within  the  United  States. 

Tax   on   Excess   Profits 

Section  201.  That  in  addition  to  the  taxes  under  existing  law 
and  under  this  Act  there  shall  be  levied,  assessed,  collected,  and 
paid  for  each  taxable  year  upon  the  income  of  every  corpora- 
tion, partnership,  or  individual,  a  tax  (hereinafter  in  this  title 
referred  to  as  the  tax)  equal  to  the  following  percentages  of 
the  net  income: 

Twenty  per  centum  of  the  amount  of  the  net  income  in 
excess  of  the  deduction  (determined  as  hereinafter  provided)  and 
not  in  excess  of  fifteen  per  centum  of  the  invested  capital  for 
the  taxable  year; 

Twenty-five  per  centum  of  the  amount  of  the  net  income 
in  excess  of  fifteen  per  centum  and  not  in  excess  of  twenty  per 
centum  of  such  capital ; 

Thirty-five  per  centum  of  the  amount  of  the  net  income  in 
excess  of  twenty  per  centum  and  not  in  excess  of  twenty-five 
per  centum  of  such  capital; 


THE  FEDERAL  WAR  TAX   LAW,   1917  13 

Forty-five  per  centum  of  the  amount  of  the  net  income  in 
excess  of  twenty-five  per  centum  and  not  in  excess  of  thirty- 
three  per  centum  of  such  capital ;  and 

Sixty  per  centum  of  the  amount  of  the  net  income  in  excess 
of  thirty-three  per  centum  of  such  capital. 

For  the  purpose  of  this  title  every  corporation  or  partner- 
ship not  exempt  under  the  provisions  of  this  section  shall  be 
deemed  to  be  engaged  in  business,  and  all  the  trades  and  busi- 
nesses in  which  it  is  engaged  shall  be  treated  as  a  single  trade 
or  business,  and  all  its  income  from  whatever  source  derived  shall 
be  deemed  to  be  received  from  such  trade  or  business. 

Exemptions 

This  title  shall  apply  to  all  trades  or  businesses  of  whatever 
description,  whether  continuously  carried  on  or  not,  except — 

(a)  In  the  case  of  officers  and  employees  under  the  United 
States,  or  any  State,  Territory,  or  the  District  of  Columbia,  or 
any  local  subdivision  thereof,  the  compensation  or  fees  received 
by  them  as  such  officers  or  employees ; 

(b)  Corporations  exempt  from  tax  under  the  provisions  of 
section  eleven  of  Title  I  of  such  Act  of  September  eighth,  nine- 
teen hundred  and  sixteen  :l 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  11  (a)  That  there 
shall  not  be  taxed  under  this  title  any  income  received  by  any — 

First.     Labor,  agricultural,  or  horticultural  organization; 

Second.  Mutual  savings  bank  not  having  a  capital  stock  represented 
by  shares; 

Third.  Fraternal  beneficiary  society,  order,  or  association,  operating 
under  the  lodge  system  or  for  the  exclusive  benefit  of  the  members  of 
a  fraternity  itself  operating  under  the  lodge  system,  and  providing 
for  the  payment  of  life,  sick,  accident,  or  other  benefits  to  the  members 
of  such  society,  order,  or  association  or  their  dependents; 

Fourth.  Domestic  building  and  loan  association  and  co-operative 
banks  without  capital  stock  organized  and  operated  for  mutual  purposes 
and  without  profit; 

Fifth.  Cemetery  company  owned  and  operated  exclusively  for  the 
benefit  of  its  members; 

Sixth.  Corporation  or  association  organized  and  operated  ex- 
clusively for  religious,  charitable,  scientific,  or  educational  purposes,  no 
part  of  the  net  income  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual; 

Seventh.  Business  league,  chamber  of  commerce,  or  board  of  trade, 
not  organized  for  profit  and  no  part  of  the  net  income  of  which  inures 
to  the  benefit  of  any  private  stockholder  or  individual; 

Eighth.  Civic  league  or  organization  not  organized  for  profit  but 
operated  exclusively  for  the  promotion  of  social  welfare; 

Ninth.  Club  organized  and  operated  exclusively  for  pleasure,  recrea- 
tion, and  other  nonprofitable  purposes,  no  part  of  the  net  income  of 
which  inures  to  the  benefit  of  any  private  stockholder  or  member; 

Tenth.  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance 
company,  mutual  ditch  or  irrigation  company,  mutual  or  cooperative 
telephone  company,  or  like  organization  of  a  purely  local  character, 
the  income  of  which  consists  solely  of  assessments,  dues,  and  fees  col- 
lected from  members  for  the  sole  purpose  of  meeting  its  expenses; 

Eleventh.    Farmers',  fruit  growers',  or  like  association,  organized 


14  THE  FEDERAL  WAR  TAX  LAW,   1917 

As  amended  by  this  Act,  and  partnerships  and  individuals 
carrying  on  or  doing  the  same  business,  or  coming  within  the 
same  description;  and 

(c)  Incomes  derived  from  the  business  of  life,  health,  and 
accident  insurance  combined  in  one  policy  issued  on  the  weekly 
premium  payment  plan. 

Foreign  Business 

Section  202.  That  the  tax  shall  not  be  imposed  in  the  case 
of  the  trade  or  business  of  a  foreign  corporation  or  partnership 
or  a  non-resident  alien  individual,  the  net  income  of  which  trade 
or  business  during  the  taxable  year  is  less  than  $3,000. 

Deductions 

Section  203.  That  for  the  purpose  of  this  title  the  deduc- 
tion shall  be  as  follows,  except  as  otherwise  in  this  title  provided : 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (1) 
an  amount  equal  to  the  same  percentage  of  the  invested  capital 
for  the  taxable  year  which  the  average  amount  of  the  annual 
net  income  of  the  trade  or  business  during  the  prewar  period 
was  of  the  invested  capital  for  the  prewar  period  (but  not  less 
than  seven  or  more  than  nine  per  centum  of  the  invested  capital 
for  the  taxable  year),  and  (2)  $3,000; 

and  operated  as  a  sales  agent  for  the  purpose  of  marketing  the  products 
of  its  members  and  turning  back  to  them  the  proceeds  of  sales,  less 
the  necessary  selling  expenses,  on  the  basis  of  the  quantity  of  produce 
furnished  by  them; 

Twelfth.  Corporation  or  association  organized  for  tne  exclusive 
purpose  of  holding  title  to  property,  collecting  income  therefrom,  and 
turning  over  the  entire  amount  thereof,  less  expenses,  to  an  organization 
which  itself  is  exempt  from  the  tax  imposed  by  this  title;  or 

Thirteenth.  Federal  land  banks  and  national  farm-loan  associations 
as  provided  in  section  twenty-six  of  the  Act  approved  July  seventeenth, 
nineteen  hundred  and  sixteen,  entitled  "An  Act  to  provide  capital  for 
agricultural  development,  to  create  standard  forms  of  investment  based 
upon  farm  mortgage,  to  equalize  rates  of  interest  upon  farm  loans,  to 
furnish  a  market  for  United  States  bonds,  to  create  Government  de- 
positaries and  financial  agents  for  the  United  States,  and  for  other 
purposes." 

Fourteenth.  Joint  stock  land  banks  as  to  income  derived  from  bonds 
or  debentures  of  other  joint  stock  land  banks  or  any  Federal  land  bank 
belonging  to  such  joint  stock  land  bank. 

(b)  There  shall  not  be  taxed  under  this  title  any  income  derived 
from  any  public  utility  or  from  the  exercise  of  any  essential  govern- 
mental function  accruing  to  any  State,  Territory,  or  the  District  of 
Columbia,  or  any  political  subdivision  of  a  State  or  Territory,  nor  any 
income  accruing  to  the  government  of  the  Philippine  Islands  or  Porto 
Rico,  or  of  any  political  subdivision  of  the  Philippine  Islands  or  Porto 
Rico:  Provided,  That  whenever  any  State.  Territory,  or  the  District 
of  Columbia,  or  any  political  subdivision  of  a  State  or  Territory,  has, 
prior  to  the  passage  of  this  title,  entered  in  good  faith  into  a  contract 
with  any  person  or  corporation,  the  object  and  purpose  of  which  is 
to  acquire,  construct,  operate,  or  maintain  a  public  utility,  no  tax  shall 
be  levied  under  the  provisions  of  this  title  upon  the  income  derived 


THE  FEDERAL  WAR  TAX   LAW,    1917  15 

(b)  In  the  case  of  a  domestic  partnership  or  of  a  citizen 
or  resident  of  the  United  States,  the  sum  of  (1)  an  amount  equal 
to  the  same  percentage  of  the  invested  capital  for  the  taxable 
year  which  the  average  amount  of  the  annual  net  income  of  the 
trade  or  business  during  the  prewar  period  was  of  the  invested 
capital  for  the  prewar  period  (but  not  less  than  seven  or  more 
than  nine  per  centum  of  the  invested  capital  for  the  taxable 
year),  and  (2)  $6,000; 

(c)  In  the  case  of  a  foreign  corporation  or  partnership  or 
of  a  non-resident  alien  individual,  an  amount  ascertained  in  the 
same  manner  as  provided  in  subdivisions  (a)  and  (b)  without 
any  exemption  of  $3,000  or  $6,000. 

(d)  If  the  Secretary  of  the  Treasury  is  unable  satisfactorily 
to  determine  the  average  amount  of  the  annual  net  income  of 
the  trade  or  business  during  the  prewar  period,  the  deduction 
shall  be  determined  in  the  same  manner  as  provided  in  section 
two  hundred  and  five. 

If  Not  Engaged  in  the  Business  During  Prewar  Period 

Section  204.  That  if  a  corporation  or  partnership  was  not  in 
existence,  or  an  individual  was  not  engaged  in  the  trade  or 
business,  during  the  whole  of  any  one  calendar  year  during 
the  prewar  period,  the  deduction  shall  be  an  amount  equal  to 
eight  per  centum  of  the  invested  capital  for  the  taxable  year, 
plus  in  the  case  of  a  domestic  corporation  $3,000,  and  in  the  case 
of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United 
States  $6,000. 

Continuation  or  Reorganization  of  a  Business 

A  trade  or  business  carried  on  by  a  corporation,  partnership, 
or  individual,  although  formally  organized  or  reorganized  on 
or  after  January  second,  nineteen  hundred  and  thirteen,  which 
is  substantially  a  continuation  of  a  trade  or  business  carried  on 
prior  to  that  date,  shall,  for  the  purposes  of  this  title,  be  deemed 
to  have  been  in  existence  prior  to  that  date,  and  the  net  income 
and  invested  capital  of  its  predecessor  prior  to  that  date  shall 
be  deemed  to  have  been  its  net  income  and  invested  capital. 

Low  Prewar  Income 

Section  205.  (a)  That  if  the  Secretary  of  the  Treasury,  upon 
complaint  finds  either  (1)  that  during  the  prewar  period  a 
domestic  corporation  or  partnership,  or  a  citizen  or  resident  of 
the  United  States,  had  no  net  income  from  the  trade  or  busi- 

frpm  the  operation  of  such  public  utility,  so  far  as  the  payment  thereof 
will  impose  a  loss  or  burden  upon  such  State,  Territory,  or  the  District 
of  Columbia,  or  a  political  subdivision  of  a  State  or  Territory;  but  this 
provision  is  not  intended  to  confer  upon  such  person  or  corporation 
any  financial  gain  or  exemption  or  to  relieve  such  person  or  corporation 
from  the  payment  of  a  tax  as  provided  for  in  this  title  upon  the  part 
or  portion  of  the  said  income  to  which  such  person  or  corporation  shall 
be  entitled  under  such  contract. 


16  THE  FEDERAL  WAR  TAX  LAW,   1917 

ness,  or,  (2)  that  during  the  prewar  period  the  percentage,  which 
the  net  income  was  of  the  invested  capital,  was  low  as  com- 
pared with  the  percentage,  which  the  net  income  during  such 
period  of  representative  corporations,  partnerships,  and  indi- 
viduals, engaged  in  a  like  or  similar  trade  or  business,  was  of 
their  invested  capital,  then  the  deduction  shall  be  the  sum  of 
(1)  an  amount  equal  to  the  same  percentage  of  its  invested 
capital  for  the  taxable  year  which  the  average  deduction  (deter- 
mined in  the  same  manner  as  provided  in  section  two  hundred 
and  three,  without  including  the  $3,000  or  $6,000  therein  referred 
to)  for  such  year  of  representative  corporations,  partnerships, 
or  individuals,  engaged  in  a  like  or  similar  trade  or  business, 
is  of  their  average  invested  capital  for  such  year  plus  (2)  in 
the  case  of  a  domestic  corporation  $3,000,  and  in  the  case  of  a 
domestic  partnership  or  a  citizen  or  resident  of  the  United  States 
$6,000. 

Determination  of  Deductions 

The  percentage  which  the  net  income  was  of  the  invested 
capital  in  each  trade  or  business  shall  be  determined  by  the 
Commissioner  of  Internal  Revenue,  in  accordance  with  regula- 
tions prescribed  by  him,  with  the  approval  of  the  Secretary  of 
the  Treasury.  In  the  case  of  a  corporation  or  partnership  which 
has  fixed  its  own  fiscal  year,  the  percentage  determined  by  the 
calendar  year  ending  during  such  fiscal  year  shall  be  used. 

Claim  for  Abatement 

(b)  The  tax  shall  be  assessed  upon  the  basis  of  the  deduc- 
tion determined  as  provided  in  section  two  hundred  and  three, 
but  the  taxpayer  claiming  the  benefit  of  this  section  may  at 
the  time  of  making  the  return  file  a  claim  for  abatement  of  the 
amount  by  which  the  tax  so  assessed  exceeds  a  tax  computed 
upon  the  basis  of  the  deduction  determined  as  provided  in  this 
section.  In  such  event,  collection  of  the  part  of  the  tax  covered 
by  such  claim  for  abatement  shall  not  be  made  until  the  claim 
is  decided,  but  if  in  the  judgment  of  the  Commissioner  of  In- 
ternal Revenue,  the  interests  of  the  United  States  would  be 
jeopardized,  thereby  he  may  require  the  claimant  to  give  a  bond 
in  such  amount  and  with  such  sureties  as  the  commissioner  may 
think  wise  to  safeguard  such  interests,  conditioned  for  the  pay- 
ment of  any  tax  found  to  be  due,  with  the  interest  thereon,  and 
if  such  bond,  satisfactory  to  the  commissioner,  is  not  given 
within  such  time  as  he  prescribes,  the  full  amount  of  tax  as- 
sessed shall  be  collected  and  the  amount  overpaid,  if  any,  shall 
upon  final  decision  of  the  application  be  refunded  as  a  tax  errone- 
ously or  illegally  collected. 

Ascertainment  of  the  Net  Income 

Section  206.  That  for  the  purposes  of  this  title  the  net 
income  of  a  corporation  shall  be  ascertained  and  returned  (a) 
for  the  calendar  years  nineteen  hundred  and  eleven  and  nineteen 


THE  FEDERAL  WAR  TAX   LAW,   1917  17 

hundred  and  twelve  upon  the  same  basis  and  in  the  same  manner 
as  provided  in  section  thirty-eight  of  the  Act  entitled  "An  Act 
to  provide  revenue,  equalize  duties,  and  encourage  the  indus- 
tries of  the  United  States,  and  for  other  purposes,"  approved 
August  fifth,  nineteen  hundred  and  nine,  except  that  income 
taxes  paid  by  it  within  the  year  imposed  by  the  authority  of 
the  United  States  shall  be  included ;  (b)  for  the  calendar  year 
nineteen  hundred  and  thirteen  upon  the  same  basis  and  in  the 
same  manner  as  provided  in  section  II  of  the  Act  entitled  "An 
Act  to  reduce  tariff  duties  and  to  provide  revenue  for  the  Gov- 
ernment, and  for  other  purposes,"  approved  October  third,  nine- 
teen hundred  and  thirteen,  except  that  income  taxes  paid  by  it 
within  the  year  imposed  by  the  authority  of  the  United  States 
shall  be  included,  and  except  that  the  amounts  received  by  it 
as  dividends  upon  the  stock  or  from  the  net  earnings  of  other 
corporations,  joint-stock  companies  or  associations,  or  insurance 
companies,  subject  to  the  tax  imposed  by  section  II  of  such 
Act  of  October  third,  nineteen  hundred  and  thirteen,  shall  be 
deducted ;  and  (c)  for  the  taxable  year  upon  the  same  basis 
and  in  the  same  manner  as  provided  in  Title  I  of  the  Act  entitled 
"An  Act  to  increase  the  revenue  and  for  other  purposes,"  ap- 
proved September  eighth,  nineteen  hundred  and  sixteen  :x 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  2  (a)  That,  subject 
only  to  such  exemptions  and  deductions  as  are  hereinafter  allowed, 
the  net  income  of  a  taxable  person  shall  include  gains,  profits,  and 
income  derived  from  salaries,  wages,  or  compensation  for  personal 
service  or  whatever  kind  and  in  whatever  form  paid,  or  from  professions, 
vocations,  businesses,  trade,  commerce,  or  sales,  or  dealings  in  property, 
whether  real  or  personal,  growing  out  of  the  ownership  or  use  of  or 
interest  in  real  or  personal  property,  also  from  interest,  rent,  dividends, 
securities,  or  the  transaction  of  any  business  carried  on  for  gain  or 
profit,  or  gains  or  profits  and  income  derived  from  any  source  whatever: 
Provided,  That  the  term  "dividends"  as  used  in  this  title  shall  be  held 
to  mean  any  distribution  made  or  ordered  to  be  made  by  a  corporation, 
joint-stock  company,  association,  or  insurance  company,  out  of  its 
earnings  or  profits  accrued  since  March  first,  nineteen  hundred  and 
thirteen,  and  payable  to  its  shareholders,  whether  in  cash  or  in  stock 
of  the  corporation,  joint-stock  company,  association,  or  insurance  com- 
pany, which  stock  dividend  shall  be  considered  income,  to  the  amount 
of  its  cash  value. 

.  (b)  Income  received  by  estates  of  deceased  persons  during  the 
period  of  administration  or  settlement  of  the  estate,  shall  be  subject  to 
the  normal  and  additional  tax  and  taxed  to  their  estates,  and  also  such 
income  of  estates  or  any  kind  of  property  held  in  trust,  including  such 
income  accumulated  in  trust  for  the  benefit  of  unborn  or  unascertained 
persons,  or  persons  with  contingent  interests,  and  income  held  for 
future  distribution  under  the  terms  of  the  will  or  trust  shall  be  like- 
wise taxed,  the  tax  in  each  instance,  except  when  the  income  is  returned 
for  the  purpose  of  the  tax  by  the  beneficiary,  to  be  assessed  to  the 
executor,  administrator,  or  trustee,  as  the  case  may  be:  Provided,  That 
where  the  income  is  to  be  distributed  annually  or  regularly  between 
existing  heirs  or  legatees,  or  beneficiaries  the  rate  of  tax  and  method 
of  computing  the  same  shall  be  based  in  each  case  upon  the  amount 
of  the  individual  share  to  be  distributed. 

Such  trustees,  executors,  administrators,  and  other  fiduciaries  are 


18  THE  FEDERAL  WAR  TAX  LAW,   1917 

As  amended  by  this  Act,  except  that  the  amounts  received 
by  it  as  dividends  upon  the  stock  or  from  the  net  earnings  of 
other  corporations,  joint-stock  companies  or  associations,  or 
insurance  companies,  subject  to  the  tax  imposed  by  Title  I  of 
such  Act  of  September  eighth,  nineteen  hundred  and  sixteen, 
shall  be  deducted. 

Partnerships  and  Individuals 

The  net  income  of  a  partnership  or  individual  shall  be  as- 
certained and  returned  for  the  calendar  years  nineteen  hundred 
and  eleven,  nineteen  hundred  and  twelve,  nineteen  hundred  and 
thirteen,  and  for  the  taxable  year,  upon  the  same  basis  and 
in  the  same  manner  as  provided  in  Title  I  of  such  Act  of  Septem- 
ber eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this 
Act,  except  that  the  credit  allowed  by  subdivision  (b)  of  section 
five  of  such  Act  shall  be  deducted.1 

There  shall  be  allowed  (a)  in  the  case  of  a  domestic  partner- 
ship the  same  deductions  as  allowed  to  individuals  in  subdi- 
vision (a)  of  section  five  of  such  Act  of  September  eighth,  nine- 
teen hundred  and  sixteen:2 

hereby  indemnified  against  the  claims  or  demands  of  every  beneficiary 
for  all  payments  of  taxes  which  they  shall  be  required  to  make  under 
the  provisions  of  this  title,  and  they  shall  have  credit  for  the  amount 
of  such  payments  against  the  beneficiary  or  principal  in  any  accounting 
which  they  make  as  such  trustees  or  other  fiduciaries. 

(c)  For  the  purpose  of  ascertaining  the  gain  derived  from  the 
sale  or  other  disposition  of  property,  real,  personal,  or  mixed,  acquired 
before  March  first,  nineteen  hundred  and  thirteen,  the  fair  market  price 
or  value  of  such  property  as  of  March  first,  nineteen  hundred  and  thir- 
teen, shall  be  the  basis  for  determining  the  amount  of  such  gain  derived. 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  5  (b)  For  the  purpose 
of  the  normal  tax  only,  the  income  embraced  in  a  personal  return  shall 
be  credited  with  the  amount  received  as  dividends  upon  the  stock  or 
from  the  net  earnings  of  any  corporation,  joint-stock  company  or 
association,  trustee,  or  insurance  company,  which  is  taxable  upon  its 
net  income  as  hereinafter  provided. 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  5  (a)  That  in  computing 
net  income  in  the  case  of  a  citizen  or  resident  of  the  United  States — 

(a)  For  the  purpose  of  the  tax  there  shall  be  allowed  as  de- 
ductions— 

First.  The  necessary  expenses  actually  paid  in  carrying  on  any 
business  or  trade,  not  including  personal,  living,  or  family  expenses; 

Second.     All  interest  paid  within  the  year  on  his  indebtedness; 

Third.  Taxes  paid  within  the  year  imposed  by  the  authority  of  the 
United  States,  or  its  Territories,  or  possessions,  or  any  foreign  country, 
or  under  the  authority  of  any  State,  county,  school  district,  or  munici- 
pality, or  other  taxing  subdivision  of  any  State,  not  including  those 
assessed  against  local  benefits; 

Fourth.  Losses  actually  sustained  during  the  year,  incurred  in  his 
business  or  trade,  or  arising  from  fires,  storms,  shipwreck,  or  other 
casualty,  and  from  theft,  when  such  losses  are  not  compensated  for  by 
insurance  or  otherwise:  Provided,  That  for  the  purpose  of  ascertaining 
the  loss  sustained  from  the  sale  or  other  disposition  of  property,  real, 
personal,  or  mixed,  acquired  before  March  first,  nineteen  hundred  and 
thirteen,  the  fair  market  price  or  value  of  such  property  as  of  March 


THE  FEDERAL  WAR  TAX   LAW,   1917  19 

as  amended  by  this  Act;  and  (b)  in  the  case  of  a  foreign 
partnership  the  same  deductions  as  allowed  to  individuals  in 
subdivision  (a)  of  section  six  of  such  Act1  as  amended  by 
this  Act. 

first,  nineteen  hundred  and  thirteen,  shall  be  the  basis  for  determining 
the  amount  of  such  loss  sustained; 

Fifth.  In  transactions  entered  into  for  profit  but  not  connected 
with  his  business  or  trade,  the  losses  actually  sustained  therein  during 
the  year  to  an  amount  not  exceeding  the  profits  arising  therefrom; 

Sixth.  Debts  due  to  the  taxpayer  actually  ascertained  to  be  worth- 
less and  charged  off  within  the  year; 

Seventh.  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear 
of  property  arising  out  of  its  use  or  employment  in  the  business  or 
trade; 

Eighth  (a)  In  the  case  of  oil  and  gas  wells  a  reasonable  allowance 
for  actual  reduction  in  flow  and  production  to  be  ascertained  not  by 
the  flush  flow,  but  by  the  settled  production  or  regular  flow;  (b)  in  the 
case  of  mines  a  reasonable  allowance  for  depletion  thereof  not  to  exceed 
the  market  value  in  the  mine  of  the  product  thereof,  which  has  been 
mined  and  sold  during  the  year  for  which  the  return  and  computation 
are  made,  such  reasonable  allowance  to  be  made  in  the  case  of  both 
(a)  and  (b)  under  rules  and  regulations  to  be  prescribed  by  the  Secretary 
of  the  Treasury:  Provided,  That  when  the  allowances  authorized  in 
(a)  and  (b)  shall  equal  the  capital  originally  invested  or  in  case  of 
purchase  made  prior  to  March  first,  nineteen  hundred  and  thirteen,  the 
fair  market  value  as  of  that  date,  no  further  allowance  shall  be  made. 
No  deduction  shall  be  allowed  for  any  amount  paid  out  for  new  buildings, 
permanent  improvements,  or  betterments,  made  to  increase  the  value 
of  any  property  or  estate,  and  no  deduction  shall  be  made  for  any 
amount  of  expense  of  restoring  property  or  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has  been  made. 

"That  section  five  of  such  Act  of  September  eighth,  nineteen  hun- 
dred and  sixteen,  is  hereby  amended  by  adding  at  the  end  of  subdivision 
(a)  a  further  paragraph,  numbered  nine,  to  read  as  follows: 

"Ninth.  Contributions  or  gifts  actually  made  within  the  year  of 
corporations  or  associations  organized  and  operated  exclusively  for 
religious,  charitable,  scientific,  or  educational  purposes,  or  to  societies 
for  the  prevention  of  cruelty  to  children  or  animals,  no  part  of  the  net 
income  of  which  inures  to  the  benefit  of  any  private  stockholder  or  in- 
dividual, to  an  amount  not  in  excess  of  fifteen  per  centum  of  the  tax- 
payer's taxable  net  income  as  computed  without  the  benefit  of  this  para- 
graph. Such  contributions  or  gifts  shall  be  allowable  as  deductions 
only  if  verified  under  rules  and  regulations  prescribed  by  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury." 

"(ACT  OF  SEPTEMBER  8th,  1916)  Section  6.  That  in  computing 
net  income  in  the  case  of  a  nonresident  alien — 

(a)  For  the  purpose  of  the  tax  there  shall  be  allowed  as  de- 
ductions— 

First.  The  necessary  expenses  actually  paid  in  carrying  on  any 
business  or  trade  conducted  by  him  within  the  United  States,  not  in- 
cluding personal,  living,  or  family  expenses; 

Second.     The   proportion   of   all   interest   paid   within   the   year  by 


20  THE  FEDERAL  WAR  TAX  LAW,   1917 

Invested  Capital  Defined 

Section  207.  That  as  used  in  this  title,  the  term  "invested 
capital"  for  any  year  means  the  average  invested  capital  for 
the  year,  as  defined  and  limited  in  this  title,  averaged  monthly. 

As  used  in  this  title  "invested  capital"  does  not  include 
stocks,  bonds  (other  than  obligations  of  the  United  States), 
or  other  assets,  the  income  from  which  is  not  subject  to  the  tax 
imposed  by  this  title  nor  money  or  other  property  borrowed, 
and  means,  subject  to  the  above  limitations; 

Corporations  or  Partnerships 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual 
cash  paid  in,  (2)  the  actual  cash  value  of  tangible  property  paid 
in  other  than  cash,  for  stock  or  shares  in  such  corporation  or 
partnership,  at  the  time  of  such  payment  (but  in  case  such  tangi- 
ble property  was  paid  in  prior  to  January  first,  nineteen  hundred 
and  fourteen,  the  actual  cash  value  of  such  property  as  of  Janu- 
ary first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed 
the  par  value  of  the  original  stock  or  shares  specifically  issued 
therefor),  and  (3)  paid  in  or  earned  surplus  and  undivided 

such  person  on  his  indebtedness  which  the  gross  amount  of  his  income 
for  the  year  derived  from  sources  within  the  United  States  bears  to 
the  gross  amount  of  his  income  for  the  year  derived  from  all  sources 
within  and  without  the  United  States,  but  this  deduction  shall  be 
allowed  only  if  such  person  includes  in  the  return  required  by  section 
eight  all  the  information  necessary  for  its  calculation; 

Third.  Taxes  paid  within  the  year  imposed  by  the  authority  of  the 
United  States,  or  its  Territories,  or  possessions,  or  under  the  authority  of 
any  State,  county,  school  district,  or  municipality,  or  other  taxing  sub- 
division of  any  State,  paid  within  the  United  States,  not  including  those 
assessed  against  local  benefits; 

Fourth.  Losses  actually  sustained  during  the  year,  incurred  in 
business  or  trade  conducted  by  him  within  the  United  States,  and  losses 
of  property  within  the  United  States  arising  from  fires,  storms,  ship- 
wreck, or  other  casualty,  and  from  theft,  when  such  losses  are  not 
compensated  for  by  insurance  or  otherwise:  Provided,  That  for  the 
purpose  of  ascertaining  the  amount  of  such  loss  or  losses  sustained  in 
trade,  or  speculative  transactions  not  in  trade,  from  the  same  or  any 
kind  of  property  acquired  before  March  first,  nineteen  hundred  and 
thirteen,  the  fair  market  price  or  value  of  such  property  as  of  March 
first,  nineteen  hundred  and  thirteen,  shall  be  the  basis  for  determining 
the  amount  of  such  loss  or  losses  sustained; 

Fifth.  In  transactions  entered  into  for  profit  but  not  connected 
with  his  business  or  trade,  the  losses  actually  sustained  therein  during 
the  year  to  an  amount  not  exceeding  the  profits  arising  therefrom  in 
the  United  States; 

Sixth.  Debts  arising  in  the  course  of  business  or  trade  conducted 
by  him  within  the  United  States  due  to  the  taxpayer  actually  ascertained 
to  be  worthless  and  charged  off  within  the  year; 

Seventh.  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear 
of  property  within  the  United  States  arising  out  of  its  use  or  employ- 
ment in  the  business  or  trade;  (a)  in  the  case  of  oil  and  gas  wells  a 
reasonable  allowance  for  actual  reduction  in  flow  and  production  to 
be  ascertained  not  by  the  flush  flow,  but  by  the  settled  production  or 
regular  flow;  (b)  in  the  case  of  mines  a  reasonable  allowance  for  de- 


THE  FEDERAL  WAR  TAX  LAW,   1917  21 

profits  used  or  employed  in  the  business,  exclusive  of  undivided 
profits  earned  during  the  taxable  year:  Provided,  That  (a)  the 
actual  cash  value  of  patents  and  copyrights  paid  in  for  stock  or 
shares  in  such  corporation  or  partnership,  at  the  time  of  such 
payment,  shall  be  included  as  invested  capital  but  not  to  exceed 
the  par  value  of  such  stock  or  shares  at  the  time  of  such  pay- 
ment, and  (b)  the  good  will,  trade-marks,  trade  brands,  the 
franchise  of  a  corporation  or  partnership,  or  other  intangible 
property,  shall  be  included  as  invested  capital  if  the  corporation 
or  partnership  made  payment  bona  fide  therefor  specifically  as 
such  in  cash  or  tangible  property,  the  value  of  such  good  will, 
trade-mark,  trade  brand,  franchise,  or  intangible  property,  not  to 
exceed  the  actual  cash  or  actual  cash  value  of  the  tangible  prop- 
erty paid  therefor  at  the  time  of  such  payment;  but  good  will, 
trade-marks,  trade  brands,  franchise  of  a  corporation  or  partner- 
ship, or  other  intangible  property,  bona  fide  purchased,  prior 
to  March  third,  nineteen  hundred  and  seventeen,  for  and  with 
interests  or  shares  in  a  partnership  or  for  and  with  shares 
in  the  capital  stock  of  a  corporation  (issued  prior  to  March  third, 
nineteen  hundred  and  seventeen),  in  an  amount  not  to  exceed, 
on  March  third,  nineteen  hundred  and  seventeen,  twenty  per 
centum  of  the  total  interests  or  shares  in  the  partnership  or  of 
the  total  shares  of  the  capital  stock  of  the  corporation,  shall  be 
included  in  invested  capital  at  a  value  not  to  exceed  the  actual 
cash  value  at  the  time  of  such  purchase,  and  in  case  of  issue 
of  stock  therefor  not  to  exceed  the  par  value  of  such  stock ; 

Individuals 

(b)  In  the  case  of  an  individual,  (1)  actual  cash  paid  into 
the  trade  or  business,  and  (2)  the  actual  cash  value  of  tangible 
property  paid  into  the  trade  or  business,  other  than  cash,  at 
the  time  of  such  payment  (but  in  case  such  tangible  property  was 
paid  in  prior  to  January  first,  nineteen  hundred  and  fourteen,  the 
actual  cash  value  of  such  property  as  of  January  first,  nineteen 
hundred  and  fourteen),  and  (3)  the  actual  cash  value  of  patents, 
copyrights,  good  will,  trade-marks,  trade  brands,  franchises,  or 
other  intangible  property,  paid  into  the  trade  or  business,  at 

pletion  thereof  not  to  exceed  the  market  value  in  the  mine  of  the 
product  thereof  which  has  been  mined  and  sold  during  the  year  for 
which  the  return  and  computation  are  made,  such  reasonable  allowance 
to  be  made  in  the  case  of  both  (a)  and  (b)  under  rules  and  regulations 
to  be  prescribed  by  the  Secretary  of  the  Treasury:  Provided,  That  when 
the  allowance  authorized  in  (a)  and  (b)  shall  equal  the  capital  originally 
invested,  or  in  case  of  purchase  made  prior  to  March  first,  nineteen 
hundred  and  thirteen,  the  fair  market  value  as  of  that  date,  no  further 
allowance  shall  be  made.  No  deduction  shall  be  allowed  for  any  amount 
paid  out  for  new  buildings,  permanent  improvements,  or  betterments, 
made  to  increase  the  value  of  any  property  or  estate,  and  no  deduction 
shall  be  made  for  any  amount  of  expense  of  restoring  property  or 
making  good  the  exhaustion  thereof  for  which  an  allowance  is  or  has 
been  made. 


22  THE  FEDERAL  WAR  TAX  LAW,   1917 

the  time  of  such  payments,  if  payment  was  made  therefor  spe- 
cifically as  such  in  cash  or  tangible  property,  not  to  exceed  the 
actual  cash  or  actual  cash  value  of  the  tangible  property  bona 
fide  paid  therefor  at  the  time  of  such  payment. 

Foreign 

In  the  case  of  a  foreign  corporation  or  partnership  or  of  a 
non-resident  alien  individual  the  term  "invested  capital"  means 
that  proportion  of  the  entire  invested  capital,  as  defined  and 
limited  in  this  title,  which  the  net  income  from  sources  within 
the  United  States  bears  to  the  entire  net  income. 

Change  of  Business  Ownership 

Section  208.  That  in  case  of  the  reorganization,  consolida- 
tion or  change  of  ownership  of  a  trade  or  business  after  March 
third,  nineteen  hundred  and  seventeen,  if  an  interest  or  control 
in  such  trade  or  business  of  fifty  per  centum  or  more  remains 
in  control  of  the  same  persons,  corporations,  associations,  part- 
nerships, or  any  of  them,  then  in  ascertaining  the  invested  capital 
of  the  trade  or  business  no  asset  transferred  or  received  from  the 
prior  trade  or  business  shall  be  allowed  a  greater  value  than 
would  have  been  allowed  under  this  title  in  computing  the  in- 
vested capital  of  such  prior  trade  or  business  if  such  asset  had 
not  been  so  transferred  or  received,  unless  such  asset  was  paid 
for  specifically  as  such,  in  cash  or  tangible  property,  and  then 
not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible 
property  paid  therefor  at  the  time  of  such  payment. 

Nominal  Capital 

Section  209.  That  in  the  case  of  a  trade  or  business  having 
no  invested  capital  or  not  more  than  a  nominal  capital  there 
shall  be  levied,  assessed,  collected  and  paid,  in  addition  to  the 
taxes  under  existing  law  and  under  this  Act,  in  lieu  of  the 
tax  imposed  by  section  two  hundred  and  one,  a  tax  equivalent 
to  eight  per  centum  of  the  net  income  of  such  trade  or  business 
in  excess  of  the  following  deductions :  In  the  case  of  a  domestic 
corporation  $3,000,  and  in  the  case  of  a  domestic  partnership 
or  a  citizen  or  resident  of  the  United  States  $6,000;  in  the  case 
of  all  other  trades  or  business,  no  deduction. 

Invested  Capital  Undeterminable 

Section  210.  That  if  the  Secretary  of  the  Treasury  is  unable 
in  any  case  satisfactorily  to  determine  the  invested  capital,  the 
amount  of  the  deduction  shall  be  the  sum  of  (1)  an  amount  equal 
to  the  same  proportion  of  the  net  income  of  the  trade  or  busi- 
ness received  during  the  taxable  year  as  the  proportion  which 
the  average  deduction  (determined  in  the  same  manner  as  pro- 
vided in  section  two  hundred  and  three,  without  including  the 
$3,000  or  $6,000  therein  referred  to)  for  the  same  calendar  year 


THE  FEDERAL  WAR  TAX   LAW,   1917  23 

of  representative  corporations,  partnerships,  and  individuals,  en- 
gaged in  a  like  or  similar  trade  or  business,  bears  to  the  total 
net  income  of  the  trade  or  business  received  by  such  corporations, 
partnerships,  and  individuals,  plus  (2)  in  the  case  of  a  domestic 
corporation  $3,000,  and  in  the  case  of  a  domestic  partnership 
or  a  citizen  or  resident  of  the  United  States  $6,000. 

For  the  purpose  of  this  section  the  proportion  between  the 
deduction  and  the  net  income  in  each  trade  or  business  shall  be 
determined  by  the  Commissioner  of  Internal  Revenue  in  accord- 
ance with  regulations  prescribed  by  him,  with  the  approval  of 
the  Secretary  of  the  Treasury.  In  the  case  of  a  corporation  or 
partnership,  which  has  fixed  it  own  fiscal  year,  the  proportion 
determined  for  the  calendar  year  ending  during  such  fiscal  year 
shall  be  used. 

Returns 

Section  211.  That  every  foreign  partnership  having  a  net 
income  of  $3,000  or  more  for  the  taxable  year,  and  every  domestic 
partnership  having  a  net  income  of  $6,000  or  more  for  the  tax- 
able year,  shall  render  a  correct  return  of  the  income  of  the 
trade  or  business  for  the  taxable  year,  setting  forth  specifically 
the  gross  income  for  such  year,  and  the  deductions  allowed  in  this 
title.  Such  returns  shall  be  rendered  at  the  same  time  and  in 
the  same  manner  as  is  prescribed  for  income-tax  returns  under 
Title  I  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen,  as  amended  by  this  Act. 

General  Provisions 

Section  212.  That  all  administrative,  special,  and  general 
provisions  of  law,  including  the  laws  in  relation  to  the  assess- 
ment, remission,  collection,  and  refund  of  internal  revenue  taxes 
not  heretofore  specifically  repealed,  and  not  inconsistent  with 
the  provisions  of  this  title  are  hereby  extended  and  made  appli- 
cable to  all  the  provisions  of  this  title  and  to  the  tax  herein 
imposed,  and  all  provisions  of  Title  I  of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act, 
relating  to  returns  and  payment  of  the  tax  therein  imposed, 
including  penalties,  are  hereby  made  applicable  to  the  tax  im- 
posed by  this  title. 

Section  213.  That  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  shall  make  all 
necessary  regulations  for  carrying  out  the  provisions  of  this 
title,  and  may  require  any  corporation,  partenership,  or  individual, 
subject  to  the  provisions  of  this  title,  to  furnish  him  with  such 
facts,  data,  and  information  as  in  his  judgment  are  necessary  to 
collect  the  tax  imposed  by  this  title. 

Excess  Profit  Tax  of  March  3,  1917,  Repealed 

Section  214.  That  Title  II  (sections  two  hundred  to  two  hun- 
dred and  seven,  inclusive)  of  the  Act  entitled  "An  Act  to  pro- 


24  THE  FEDERAL  WAR  TAX  LAW,   1917 

vide  increased  revenue  to  defray  the  expenses  of  the  increased 
appropriations  for  the  Army  and  Navy,  and  the  extensions  of 
fortifications,  and  for  other  purposes,"  approved  March  third, 
nineteen  hundred  and  seventeen,  is  hereby  repealed.1 

'REPEALED.  (ACT  OF  MARCH  3,  1917)  Section  200.  That 
when  used  in  this  title — 

The  term  "corporation"  includes  joint-stock  companies  or  associa- 
tions, and  insurance  companies; 

The  term  "United  States"  means  only  the  States,  the  Territories 
of  Alaska  and  Hawaii,  and  the  District  of  Columbia;  and 

The  term  "taxable  year"  means  the  twelve  months  ending  December 
thirty-first,  except  in  the  case  of  a  corporation  or  partnership  allowed 
to  fix  its  own  fiscal  year,  in  which  case  it  means  such  fiscal  year.  The 
first  taxable  year  shall  be  the  year  ending  December  thirty-first,  nine- 
teen hundred  and  seventeen. 

Section  201.  That  in  addition  to  the  taxes  under  existing  laws  there 
shall  be  levied,  assessed,  collected,  and  paid  for  each  taxable  year  upon 
the  net  income  of  every  corporation  and  partnership  organized, 
authorized,  or  existing  under  the  laws  of  the  United  States,  or  of  any 
State,  Territory,  or  District  thereof,  no  matter  how  created  or  organized, 
excepting  income  derived  from  the  business  of  life,  health,  and  accident 
insurance  combined  in  one  policy  issued  on  the  weekly  premium  pay- 
ment plan,  a  tax  of  eight  per  centum  of  the  amount  by  which  such  net 
income  exceeds  the  sum  of  (a)  $5,000  and  (b)  eight  per  centum  of  the 
actual  capital  invested. 

Every  foreign  corporation  and  partnership,  including  corporations 
and  partnerships  of  the  Philippine  Islands  and  Porto  Rico,  shall  pay 
for  each  taxable  year  a  like  tax  upon  the  amount  by  which  its  net 
income  received  from  all  sources  within  the  United  States  exceeds  the 
sum  of  (a)  eight  per  centum  of  the  actual  capital  invested  and  used 
or  employed  in  the  business  in  the  United  States,  and  (b)  that  propor- 
tion of  $5,000  which  the  entire  actual  capital  invested  and  used  or 
employed  in  the  business  in  the  United  States  bears  to  the  entire  actual 
capital  invested;  and  in  case  no  such  capital  is  used  or  employed  in  the 
business  in  the  United  States  the  tax  shall  be  imposed  upon  that  portion 
of  such  net  income  which  is  in  excess  of  the  sum  of  (a)  eight  per 
centum  of  that  proportion  of  the  entire  actual  capital  invested  and 
used  or  employed  in  the  business  which  the  net  income  from  sources 
within  the  United  States  bears  to  the  entire  net  income,  and  (b)  that 
proportion  of  $5,000  which  the  net  income  from  sources  within  the 
United  States  bears  to  the  entire  net  income. 

Section  202.  That  for  the  purpose  of  this  title,  actual  capital  in- 
vested means  (1)  actual  cash  paid  in,  (2)  the  actual  cash  value,  at  the 
time  of  payment,  of  assets  other  than  cash  paid  in,  and  (3)  paid  in  or 
earned  surplus  and  undivided  profits  used  or  employed  in  the  business; 
but  does  not  include  money  or  other  property  borrowed  by  the  corpora- 
tion or  partnership. 

Section  203.  That  the  tax  herein  imposed  upon  corporations  and 
partnerships  shall  be  computed  upon  the  basis  of  the  net  income  shown 
by  their  income  tax  returns  under  Title  I  of  the  Act  entitled  "An  Act 
to  increase  the  revenue,  and  for  other  purposes,"  approved  September 
eighth,  nineteen  hundred  and  sixteen,  or  under  this  title,  and  shall  be 
assessed  and  collected  at  the  same  time  and  in  the  same  manner  as 
the  income  tax  due  under  Title  I  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen:  Provided,  That  for  the  purpose  of  this 
title  a  partnership  shall  have  the  same  privilege  with  reference  to 
fixing  its  fiscal  year  as  is  accorded  corporations  under  section  thirteen 
(a)  of  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen:  And  provided  further,  That  where  a  corporation  or  partnership 


THE  FEDERAL  WAR  TAX  LAW,   1917  25 

Refunds 

Any  amount  heretofore  or  hereafter  paid  on  account  of  the 
tax  imposed  by  such  Title  II,  shall  be  credited  toward  the  pay- 
ment of  the  tax  imposed  by  this  title,  and  if  the  amount  so  paid 
exceeds  the  amount  of  such  tax  the  excess  shall  be  refunded 
as  a  tax  erroneously  or  illegally  collected. 

MUNITION  TAX 
Amendments 

Subdivision  (1)  of  section  three  hundred  and  one  of  such 
Act  of  September  eighth,  nineteen  hundred  and  sixteen, 
is  hereby  amended  so  that  the  rate  of  tax  for  the  taxable 
year  nineteen  hundred  and  seventeen  shall  be  ten  per  centum 
instead  of  twelve  and  one-half  per  centum,  as  therein  provided. 

Subdivision  (2)  of  such  section:1 
is  hereby  amended  to  read  as  follows : 

"(2)  This  section  shall  cease  to  be  of  effect  on  and  after 
January  first,  nineteen  hundred  and  eighteen." 

TITLE  III.    WAR  TAX  ON  BEVERAGES 
Distilled  Spirits 

Section  300.  That  on  and  after  the  passage  of  this  Act  there 
shall  be  levied  and  collected  on  all  distilled  spirits  in  bond  at 
that  time  or  that  have  been  or  that  may  be  then  or  thereafter 
produced  in  or  imported  into  the  United  States,  except  such 
distilled  spirits  as  are  subject  to  the  tax  provided  in  section 

makes  return  prior  to  March  first,  nineteen  hundred  and  eighteen, 
covering  its  own  fiscal  year  and  includes  therein  any  income  received 
during  the  calendar  year  ending  December  thirty-first,  nineteen  hundred 
and  sixteen,  the  tax  herein  imposed  shall  be  that  proportion  of  the 
tax  based  upon  such  full  fiscal  year  which  the  time  from  January  first, 
nineteen  hundred  and  seventeen,  to  the  end  of  such  fiscal  year  bears 
to  the  full  fiscal  year. 

Section  204.  That  corporations  exempt  from  tax  under  the  pro- 
visions of  section  eleven  of  Title  I  of  the  Act  approved  September 
eighth,  nineteen  hundred  and  sixteen,  and  partnerships  carrying  on  or 
doing  the  same  business  shall  be  exempt  from  the  provisions  of  this 
title,  and  the  tax  imposed  by  this  title  shall  not  attach  to  incomes  of 
partnerships  derived  from  agriculture  or  from  personal  services. 

Section  205.  That  every  corporation  having  a  net  income  of  $5,000 
or  more  for  the  taxable  year  making  a  return  under  Title  I  of  such 
Act  of  September  eighth,  nineteen  hundred  and  sixteen,  shall  for  the 
purposes  of  this  title  include  in  such  return  a  detailed  statement  of 
the  actual  capital  invested. 

Every  partnership  having  a  net  income  of  $5,000  or  more  for  the 
taxable  year  shall  render  a  correct  return  of  the  income  of  the  partner- 
ship for  the  taxable  year,  setting  forth  specifically  the  actual  capital 
invested  and  the  gross  income  for  such  year  and  the  deductions  here- 
inafter allowed.  Such  returns  shall  be  rendered  at  the  same  time  and 


26  THE  FEDERAL  WAR  TAX  LAW,   1917 

three  hundred  and  three,  in  addition  to  the  tax  now  imposed  by 
law,  a  tax  of  $1.10  (or,  if  withdrawn  for  beverage  purposes  or 
for  use  in  the  manufacture  or  production  of  any  article  used 
or  intended  for  use  as  a  beverage,  a  tax  of  $2.10)  on  each  proof 
gallon,  or  wine  gallon  when  below  proof,  and  a  proportionate 
tax  at  a  like  rate  on  all  fractional  parts  of  such  proof  or  wine 
gallon,  to  be  paid  by  the  distiller  or  importer  when  withdrawn, 
and  collected  under  the  provisions  of  existing  law. 

Perfumes 

That  in  addition  to  the  tax  under  existing  law  there  shall 
be  levied  and  collected  upon  all  perfumes  hereafter  imported 
into  the  United  States  containing  distilled  spirits,  a  tax  of  $1.10 
per  wine  gallon,  and  a  proportionate  tax  at  a  like  rate  on  all 

in  the  same  manner  and  form  as  is  prescribed  for  income-tax  returns 
under  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen.  In  computing  net  income  of  a  partnership  for  the  purposes 
of  this  title  there  shall  be  allowed  like  deductions  as  are  allowed  to 
individuals  in  sections  five  (a)  and  six  (a)  of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen. 

Section  206.  That  all  administrative,  special,  and  general  provisions 
of  law,  including  the  laws  in  relation  to  the  assessment,  remission, 
collection,  and  refund  of  internal  revenue  taxes  not  heretofore  speci- 
fically repealed  and  not  inconsistent  with  the  provisions  of  this  title 
are  hereby  extended  and  made  applicable  to  all  the  provisions  of  this 
title  and  to  the  tax  herein  imposed,  and  all  provisions  of  Title  I  of 
such  Act  of  September  eighth,  nineteen  hundred  and  sixteen,  relating 
to  returns  and  payment  of  the  tax  therein  imposed,  including  penalties, 
are  hereby  made  applicable  to  the  tax  required  by  this  title. 

Section  207.  That  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  shall  make  all  necessary 
regulations  for  carrying  out  the  provisions  of  this  title,  and  may  require 
any  corporation  or  partnership  subject  to  the  provisions  of  this  title  to 
furnish  him  with  such  facts,  data,  and  information  as  in  his  judgment 
are  necessary  to  collect  the  tax  provided  for  in  this  title. 

Section  301.  (1)  That  every  person  manufacturing  (a)  gunpowder 
and  other  explosives,  excepting  blasting  powder  and  dynamite  used  for 
industrial  purposes;  (b)  cartridges,  loaded  and  unloaded  caps  or  primers, 
exclusive  of  those  used  for  industrial  purposes;  (c)  projectiles,  shells, 
or  torpedoes  of  any  kind,  including  shrapnels,  loaded  or  unloaded,  or 
fuses,  or  complete  rounds  of  ammunition;  (d)  fire-arms,  of  any  kind  and 
appendages,  including  small  arms,  cannon,  machine  guns,  rifles  and 
bayonets;  (e)  electric  motor  boats,  submarines  or  submersible  vessels 
or  boats;  or  (f)  any  part  of  any  of  the  articles  mentioned  in  (b),  (c),  (d), 
or  (e);  shall  pay  for  each  taxable  year,  in  addition  to  the  income  tax 
imposed  by  Title  I,  an  excise  tax  of  twelve  and  one-half  per  centum 
upon  the  entire  net  profits  actually  received  or  accrued  for  said  year 
from  the  sale  or  disposition  of  such  articles  manufactured  within  the 
United  States:  Provided,  however,  That  no  person  shall  pay  such  tax 
upon  net  profits  received  during  the  year  nineteen  hundred  and  sixteen 
derived  from  the  sale  and  delivery  of  the  articles  enumerated  in  this 
section  under  contracts  executed  and  fully  performed  by  such  person 
prior  to  January  first,  nineteen  hundred  and  sixteen. 


THE  FEDERAL  WAR  TAX  LAW,   1917  27 

fractional  parts  of  such  wine  gallon.  Such  tax  shall  be  collected 
by  the  collector  of  customs  and  deposited  as  internal  revenue 
collections,  under  such  rules  and  regulations  as  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary 
of  the  Treasury,  may  prescribe. 

Importation  of  Spirits  Prohibited 

Section  301.  That  no  distilled  spirits  produced  after  the 
passage  of  this  Act  shall  be  imported  into  the  United  States 
from  any  foreign  country,  or  from  the  West  Indian  Islands 
recently  acquired  from  Denmark  (unless  produced  from  products 
the  growth  of  such  islands,  and  not  then  into  any  State  or 
Territory  or  District  of  the  United  States  in  which  the  manu- 
facture or  sale  of  intoxicating  liquor  is  prohibited),  or  from  Porto 
Rico,  or  the  Philippine  Islands.  Under  such  rules,  regulations, 
and  bonds  as  the  Secretary  of  the  Treasury  may  prescribe,  the 
provisions  of  this  section  shall  not  apply  to  distilled  spirits 
imported  for  other  than  (1)  beverage  purpose  or  (2)  use  in 
the  manufacture  or  production  of  any  article  used  or  intended 
for  use  as  a  beverage. 

Regulation  as  to  Transfer,  Gauging,  Storing,  Etc.,  of  Spirits 

Section  302.  That  at  registered  distilleries  producing  alco- 
hol, or  other  high-proof  spirits,  packages  may  be  filled  with 
such  spirits  reduced  to  not  less  than  one  hundred  proof  from 
the  receiving  cisterns  and  tax  paid  without  being  entered  into 
bonded  warehouse.  Such  spirits  may  be  also  transferred  from 
the  receiving  cisterns  at  such  distilleries,  by  means  of  pipe  lines, 
direct  to  storage  tanks  in  the  bonded  warehouse  and  may  be 
warehoused  in  such  storage  tanks.  Such  spirits  may  be  also 
transferred  in  tanks,  or  tank  cars  to  general  bonded  warehouses 
for  storage  therein,  either  in  storage  tanks  in  such  warehouses 
or  in  the  tanks  in  which  they  were  transferred.  Such  spirits 
may  also  be  transferred  after  tax  payment  from  receiving  cisterns 
or  warehouse  storage  tanks  to  tanks  or  tank  cars  and  may  be 
tranferred  in  such  tanks  or  tank  cars  to  the  premises  of  rectifiers 
of  spirits.  The  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  is  hereby  empowered  to 
prescribe  all  necessary  regulations  relating  to  the  drawing  off, 
transferring,  gauging,  storing  and  transportation  of  such  spirits ; 
the  records  to  be  kept  and  returns  to  be  made ;  the  size  and 
kind  of  packages  and  tanks  to  be  used ;  the  marking,  branding, 
numbering  and  stamping  of  such  packages  and  tanks ;  the,  kinds 
of  stamps,  if  any,  to  be  used ;  and  the  time  and  manner  of  paying 


28  THE  FEDERAL  WAR  TAX  LAW,   1917 

the  tax;  the  kind  of  bond  and  the  penal  sum  of  same.  The  tax 
prescribed  by  law  must  be  paid  before  such  spirits  are  removed 
from  the  distillery  premises,  or  from  general  bonded  warehouse 
in  the  case  of  spirits  transferred  thereto,  except  as  otherwise 
provided  by  law. 

Under  such  regulations  as  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
may  prescribe,  distilled  spirits  may  hereafter  be  drawn  from 
receiving  cisterns  and  deposited  in  distillery  warehouses  with- 
out having  affixed  to  the  packages  containing  the  same  distillery 
warehouse  stamps,  and  such  packages,  when  so  deposited  in 
warehouse,  may  be  withdrawn  therefrom  on  the  original  gauge 
where  the  same  have  remained  in  such  warehouse  for  a  period 
not  exceeding  thirty  days  from  the  date  of  deposit. 

Regulations  as  to  Spirits  for  Non-Beverage  Purposes 

Under  such  regulations  as  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
may  prescribe,  the  manufacture,  warehousing,  withdrawal,  and 
shipment,  under  the  provisions  of  existing  law,  of  ethyl  alcohol 
for  other  than  (1)  beverage  purposes  or  (2)  use  in  the  manu- 
facture or  production  of  any  article  used  or  intended  for  use  as 
a  beverage,  and  denatured  alcohol,  may  be  exempted  from  the 
provisions  of  section  thirty-two  hundred  and  eighty-three,  Re- 
vised Statutes  of  the  United  States. 

Under  such  regulations  as  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
may  prescribe,  manufacturers  of  ethyl  alcohol  for  other  than 
beverage  purposes  may  be  granted  permission  under  the  pro- 
visions of  section  thirty-two  hundred  and  eighty-five,  Revised 
Statutes  of  the  United  States,  to  fill  fermenting  tub  in  a  sweet- 
mash  distillery  not  oftener  than  once  in  forty-eight  hours : 

Tax  on  Stock  on  Hand 

Section  303.  That  upon  all  distilled  spirits  produced  in 
or  imported  into  the  United  States  upon  which  the  Tax  now 
imposed  by  law  has  been  paid,  and  which,  on  the  day  this  Act 
is  passed,  are  held  by  a  retailer  in  a  quantity  in  excess  of  fifty 
gallons  in  the  aggregate,  or  by  any  other  person,  corporation, 
partnership,  or  association  in  any  quantity,  and  which  are  in- 
tended for  sale,  there  shall  be  levied,  assessed,  collected,  and 
paid  a  tax  of  $1.10  (or,  if  intended  for  sale  for  beverage  pur- 
poses or  for  use  in  the  manufacture  or  production  of  any  article 
used  or  intended  for  use  as  a  beverage,  a  tax  of  $2.10)  on  each 
proof  gallon,  and  a  proportionate  tax  at  a  like  rate  on  an  frac- 
tional parts  of  such  proof  gallon :  Provided,  That  the  tax  on 
such  distilled  spirits  in  the  custody  of  a  court  of  bankruptcy 
in  insolvency  proceedings  on  June  first,  nineteen  hundred  and 
seventeen,  shall  be  paid  by  the  person  to  whom  the  court  delivers 


THE  FEDERAL  WAR  TAX  LAW,   1917  29 

such  distilled  spirits  at  the  time  of  such  delivery,  to  the  extent 
that  the  amount  thus  delivered  exceeds  the  fifty  gallons  herein- 
before provided. 

Tax  on  Rectified  or  Unlawfully  Refined  Spirits  to  Reduce  Proof 
After  Rectification 

Section  304.  That  in  addition  to  the  tax  now  imposed  or 
imposed  by  this  Act  on  distilled  spirits  there  shall  be  levied, 
assessed,  collected,  and  paid  a  tax  of  15  cents  on  each  proof 
gallon  and  a  proportionate  tax  at  a  like  rate  on  all  fractional 
parts  of  such  proof  gallon  on  all  distilled  spirits  or  wines  here- 
after rectified,  purified,  or  refined  in  such  manner,  and  on  all 
mixtures  hereafter  produced  in  such  manner,  that  the  person 
so  rectifying,  purifying,  refining,  or  mixing  the  same  is  a  rectifier 
within  the  meaning  of  section  thirty-two  hundred  and  forty- 
four,  Revised  Statutes,  as  amended,  and  on  all  such  articles  in 
the  possession  of  the  rectifier  on  the  day  this  Act  is  passed :  Pro- 
vided, That  this  tax  shall  not  apply  to  gin  produced  by  the  redis- 
tillation of  a  pure  spirit  over  juniper  berries  and  other  aromatics. 

When  the  process  of  rectification  is  completed  and  the  tax 
prescribed  by  this  section  has  been  paid,  it  shall  be  unlawful 
for  the  rectifier  or  other  dealer  to  reduce  in  proof  or  increase 
in  volume  such  spirits  or  wine  by  the  addition  of  water  or 
other  substance ;  nothing  herein  contained  shall,  however,  pre- 
vent a  rectifier  from  using  again  in  the  process  of  rectification 
spirits  already  rectified  and  upon  which  the  tax  has  theretofore 
been  paid. 

Exemptions 

The  tax  imposed  by  this  section  shall  not  attach  to  cordials 
or  liqueurs  on  which  a  tax  is  imposed  and  paid  under  the  Act 
entitled  "An  Act  to  increase  the  revenue,  and  for  other  pur- 
poses," approved  September  eighth,  nineteen  hundred  and  six- 
teen, nor  to  the  mixing  and  blending  of  wines,  where  such  blend- 
ing is  for  the  sole  purpose  of  perfecting  such  wines,  according 
to  commercial  standards,  nor  to  blends  made  exclusively  of 
two  or  more  pure  straight  whiskies  aged  in  wood  for  a  period 
not  less  than  four  years  and  without  the  addition  of  coloring  or 
flavoring  matter  or  any  other  substance  than  pure  water  and 
if  not  reduced  below  ninety  proof:  Provided,  That  such 
blended  whiskies  shall  be  exempt  from  tax  under  this  section 
only  when  compounded  under  the  immediate  supervision  of  a 
revenue  officer,  in  such  tanks  and  under  such  conditions  and 
supervision  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  prescribe. 

General   Provisions 

All  distilled  spirits  taxable  under  this  section  shall  be  sub- 
ject to  uniform  regulations  concerning  the  use  thereof  in  the 
manufacture,  blending,  compounding,  mixing,  marking,  brand- 


30  THE  FEDERAL  WAR  TAX  LAW,   1917 

ing,  and  sale  of  whisky  and  rectified  spirits,  and  no  discrimina- 
tion whatsoever  shall  be  made  by  reason  of  a  difference  in  the 
character  of  the  material  from  which  same  may  have  been 
produced. 

The  business  of  a  rectifier  of  spirits  shall  be  carried  on, 
and  the  tax  on  rectified  spirits  shall  be  paid,  under  such  rules, 
regulations,  and  bonds  as  may  be  prescribed  by  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary 
of  the  Treasury. 

Penalty 

Any  person  violating  any  of  the  provisions  of  this  section 
shall  be  deemed  to  be  guilty  of  a  misdemeanor  and,  upon  con- 
viction, shall  be  fined  not  more  than  $1,000  or  imprisoned  not 
more  than  two  years.  He  shall,  in  addition,  be  liable  to  double 
the  tax  evaded  together  with  the  tax,  to  be  collected  by  assess- 
ment or  on  any  bond  given. 

Stamp  Provisions 

Section  305.  That  hereafter  collectors  of  internal  revenue 
shall  not  furnish  wholesale  liquor  dealer's  stamps  in  lieu  of  and 
in  exchange  for  stamps  for  rectified  spirits  unless  the  package 
covered  by  stamp  for  rectified  spirits  is  to  be  broken  into  smaller 
packages. 

The  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  is  authorized  to  discontinue 
the  use  of  the  following  stamps  whenever  in  his  judgment  the 
interests  of  the  Government  will  be  subserved  thereby: 

Distillery  warehouse,  special  bonded  warehouse,  special 
bonded  rewarehouse,  general  bonded  warehouse,  general  bonded 
retransfer,  transfer  brandy,  export  tobacco,  export  cigars,  export 
oleomargarine  and  export  fermented  liquor  stamps. 

Installation  of  Meters 

Section  306.  That  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  is  hereby 
authorized  to  require  at  distilleries,  breweries,  rectifying  houses, 
and  wherever  else  in  his  judgment  such  action  may  be  deemed 
advisable,  the  installation  of  meters,  tanks,  pipes,  or  any  other 
apparatus  for  the  purpose  of  protecting  the  revenue,  and  such 
meters,  tanks,  and  pipes  and  all  necessary  labor  incident  thereto 
shall  be  at  the  expense  of  the  person,  corporation,  partnership, 
or  association  on  whose  premises  the  installation  is  required. 
Any  such  person,  corporation,  partnership,  or  association  refus- 
ing or  neglecting  to  install  such  apparatus  when  so  required  by 
the  commissioner  shall  not  be  permitted  to  conduct  business  on 
such  premises. 


THE  FEDERAL  WAR  TAX   LAW,   1917  31 

Tax  on  Beer,  Ale,  Porter,  Etc. 

Section  307.  That  on  and  after  the  passage  of  this  Act  there 
shall  be  levied  and  collected  on  all  beer,  lager  beer,  ale,  porter, 
and  other  similiar  fermented  liquor,  containing  one-half  per 
centum  or  more  of  alcohol,  brewed  or  manufactured  and  sold, 
or  stored  in  warehouse,  or  removed  for  consumption  or  sale, 
within  the  United  States,  by  whatever  name  such  liquors  may 
be  called,  in  addition  to  the  tax  now  imposed  by  law,  a  tax  of 
$1.50  for  every  barrel  containing  not  more  than  thirty-one  gal- 
lons, and  at  a  like  rate  for  any  other  quantity  or  for  the  fractional 
parts  of  a  barrel  authorized  and  denned  by  law. 

Removal  of  Liquors 

Section  308.  That  from  and  after  the  passage  of  this  Act 
taxable  fermented  liquors  may  be  conveyed  without  payment 
of  tax  from  the  brewery  premises  where  produced  to  a  contiguous 
industrial  distillery  of  either  class  established  under  the  Act  of 
October  third,  nineteen  hundred  and  thirteen,  to  be  used  as 
distilling  material,  and  the  residue  from  such  distillation,  contain- 
ing less  than  one-half  of  one  per  centum  of  alcohol  by  volume, 
which  is  to  be  used  in  making  beverages,  may  be  manipulated  by 
cooling,  flavoring,  carbonating,  settling,  and  filtering  on  the  dis- 
tillery premises  or  elsewhere. 

Removal  of  Liquors 

The  removal  of  the  taxable  fermented  liquor  from  the 
brewery  to  the  distillery  and  the  operation  of  the  distillery  and 
removal  of  the  residue  therefrom  shall  be  under  the  supervision 
of  such  officer  or  officers  as  the  Commissioner  of  Internal  Rev- 
enue shall  deem  proper,  and  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
is  hereby  authorized  to  make  such  regulations  from  time  to  time 
as  may  be  necessary  to  give  force  and  effect  to  this  section  and 
to  safeguard  the  revenue. 

Tax  on  Wines,  Vermuth,  Cordials,  Etc. 

Section  309.  That  upon  all  still  wines,  including  vermuth, 
and  upon  all  champagne  and  other  sparkling  wines,  liqueurs, 
cordials,  artificial  or  imitation  wines  or  compounds  sold  as  wine, 
produced  in  or  imported  into  the  United  States,  and  hereafter 
removed  from  the  custom-house,  place  of  manufacture,  or  from 
bonded  premises  for  sale  or  consumption,  there  shall  be  levied 
and  collected,  in  addition  to  the  tax  now  imposed  by  law  upon 
such  articles,  a  tax  equal  to  such  tax,  to  be  levied,  collected, 
and  paid  under  the  provisions  of  existing  law. 

Excessive  Stock  Tax 

Section  310.  That  upon  all  articles  specified  in  section  three 
hundred  and  nine  upon  which  the  tax  now  imposed  by  law  has 
been  paid  and  which  are  on  the  day  this  Act  is  passed  held 


32  THE  FEDERAL  WAR  TAX  LAW,   1917 

in  excess  of  twenty-five  gallons  in  the  aggregate  of  such  articles 
and  intended  for  sale,  there  shall  be  levied,  collected,  and  paid 
a  tax  equal  to  the  tax  imposed  by  such  section. 

Tax  on  Brandy  and  Wine  Spirits 

Section  311.  That  upon  all  grape  brandy  or  wine  spirits 
withdrawn  by  a  producer  of  wines  from  any  fruit  distillery  or 
special  bonded  warehouse  under  subdivision  (c)  of  section  four 
hundred  and  two  of  the  Act  entitled  "An  Act  to  increase  the 
revenue  and  for  other  purposes,"  approved  September  eighth, 
nineteen  hundred  and  sixteen  i1 

there  shall  be  levied,  assessed,  collected,  and  paid  in  addi- 
tion to  the  tax  therein  imposed,  a  tax  equal  to  double  such  tax, 
to  be  assessed,  collected,  and  paid  under  the  provisions  of  exist- 
ing law. 

Tax  on  Brandy  and  Wine  Used  for  Fortification 

Section  312.  That  upon  all  sweet  wines  held  for  sale  by 
the  producer  thereof  upon  the  day  this  Act  is  passed  there  shall 
be  levied,  assessed,  collected,  and  paid  an  additional  tax  equiva- 
lent to  10  cents  per  proof  gallon  upon  the  grape  brandy  or  wine 
spirits  used  in  the  fortification  of  such  wine,  and  an  additional 
tax  of  20  cents  per  proof  gallon  shall  be  levied,  assessed,  col- 
lected, and  paid  upon  all  grape  brandy  or  wine  spirits  withdrawn 
by  a  producer  of  sweet  wines  for  the  purpose  of  fortifying  such 
wines  and  not  so  used  prior  to  the  passage  of  this  Act. 

Tax  on  Sirups  and  Extracts 

Section  313.  That  there  shall  be  levied,  assessed,  collected, 
and  paid — 

(a)  Upon  all  prepared  sirups  or  extracts  (intended  for  use 
in  the  manufacture  or  production  of  beverages,  commonly  known 
as  soft  drinks,  by  soda  fountains,  bottling  establishments,  and 
other  similar  places)  sold  by  the  manufacturer,  producer,  or 
importer  thereof,  if  so  sold  for  not  more  than  $1.30  per  gallon, 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  402  (c)  That  under 
such  regulations  and  official  supervision  and  upon  the  giving  of  such 
notices,  entries,  bonds,  and  other  security  as  the  Commissioner  of  In- 
ternal Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
may  prescribe,  any  producer  of  wines  denned  under  the  provisions  of 
this  section  or  section  four  hundred  and  one  of  this  Act,  may  withdraw 
from  any  fruit  distillery  or  special  bonded  warehouse  grape  brandy,  or 
wine  spirits,  for  the  fortification  of  such  wines  on  the  premises  where 
actually  made:  Provided,  That  there  shall  be  levied  and  assessed  against 
the  producer  of  such  wines  a  tax  of  10  cents  per  proof  gallon  of  grape 
brandy  or  wine  spirits  so  used  by  him  in  the  fortification  of  such  wines 
during  the  preceding  month,  which  assessment  shall  be  paid  by  him 
within  six  months  from  the  date  of  notice  thereof:  Provided  further, 
That  nothing  herein  contained  shall  be  construed  as  exempting  any 
wines,  cordials,  liqueurs,  or  similar  compounds  from  the  payment  of 
any  tax  provided  for  in  this  section. 


THE  FEDERAL  WAR  TAX   LAW,   1917  33 

a  tax  of  5  cents  per  gallon;  if  so  sold  for  more  than  $1.30  and 
not  more  than  $2  per  gallon,  a  tax  of  8  cents  per  gallon;  if  so 
sold  for  more  than  $2  and  not  more  than  $3  per  gallon,  a  tax  of 
10  cents  per  gallon;  if  so  sold  for  more  than  $3  and  not  more 
than  $4  per  gallon,  a  tax  of  15  cents  per  gallon ;  and  if  so  sold  for 
more  than  $4  per  gallon,  a  tax  of  20  cents  per  gallon ;  and 

Tax  on  Soft  Drinks 

(b)  Upon  all  unfermented  grape  juice,  soft  drinks,  or  artifi- 
cial  mineral   waters    (not   carbonated),   and   fermented   liquors 
containing  less  than  one-half  per  centum  of  alcohol,  sold  by  the 
manufacturer,  producer,  or  importer  thereof,  in  bottles  or  other 
closed  containers,  and  upon  all  ginger  ale,  root  beer,  sarsaparilla, 
pop,  and  other  carbonated  waters  or  beverages,  manufactured 
and  sold  by  the  mnufacturer,  producer,  or  importer  of  the  car- 
bonic acid  gas  used  in  carbonating  the  same,  a  tax  of  1  cent  per 
gallon ;  and 

Tax  on  Mineral  Waters 

(c)  Upon  all  natural  mineral  waters  or  table  waters,  sold 
by  the  producer,  bottler,  or  importer  thereof,  in  bottles  or  other 
closed  containers,  at  over  10  cents  per  gallon,  a  tax  of  1  cent 
per  gallon. 

Monthly  Returns 

Section  314.  That  each  manufacturer,  producer,  bottler,  or 
importer  shall  make  monthly  returns  under  oath  to  the  collector 
of  internal  revenue  for  the  district  in  which  is  located  the  prin- 
cipal place  of  business,  containing  such  information  necessary 
for  the  assessment  of  the  tax,  and  at  such  times  and  in  such 
manner,  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  by  regulation 
prescribe. 

Tax  on  Carbonic  Acid 

Section  315.  That  upon  all  carbonic  acid  gas  in  drums  or 
other  containers  (intended  for  use  in  the  manufacture  or  pro- 
duction of  carbonated  water  or  other  drinks)  sold  by  the  manu- 
facturer, producer,  or  importer  thereof,  there  shall  be  levied, 
assessed,  collected,  and  paid  a  tax  of  5  cents  per  pound.  Such 
tax  shall  be  paid  by  the  purchaser  to  the  vendor  thereof  and 
shall  be  collected,  returned,  and  paid  to  the  United  States  by 
such  vendor  in  the  same  manner  as  provided  in  section  five 
hundred  and  three. 

TITLE  IV. 

MAN 

Cigars  and  Cigarettes 

Section  400.  That  upon  cigars  and  cigarettes,  which  shall 
be  manufactured  and  sold,  or  removed  for  consumption  or  sale, 
there  shall  be  levied  and  collected,  in  addition  to  the  taxes  now 


34  THE  FEDERAL  WAR  TAX   LAW,   1917 

imposed  by  existing  law,  the  following  taxes,  to  be  paid  by  the 
manufacturer  or  importer  thereof;  (a)  on  cigars  of  all  descrip- 
tions made  of  tobacco,  or  any  substitute  therefor,  and  weighing 
not  more  than  three  pounds  per  thousand,  25  cents  per  thousand ; 
(b)  on  cigars  made  of  tobacco,  or  any  substitute  therefor,  and 
weighing  more  than  three  pounds  per  thousand,  if  manufactured 
or  imported  to  retail  at  4  cents  or  more  each,  and  not  more  than 
7  cents  each,  $1  per  thousand ;  (c)  if  manufactured  or  imported 
to  retail  at  more  than  7  cents  each  and  not  more  than  15  cents 
each,  $3  per  thousand;  (d)  if  manufactured  or  imported  to  retail 
at  more  than  15  cents  each  and  not  more  than  20  cents  each,  $5 
per  thousand;  (e)  if  manufactured  or  imported  to  retail  at  more 
than  20  cents  each,  $7  per  thousand:  Provided,  That  the  word 
"retail"  as  used  in  this  section  shall  mean  the  ordinary  retail 
price  of  a  single  cigar,  and  that  the  Commissioner  of  Internal 
Revenue  may,  by  regulation,  require  the  manufacturer  or  im- 
porter to  affix  to  each  box  or  container  a  conspicuous  label  in- 
dicating by  letter  the  clause  of  this  section  under  which  the 
cigars  therein  contained  have  been  tax-paid,  which  must  corre- 
spond with  the  tax-paid  stamp  on  said  box  or  container;  (f)  on 
cigarettes  made  of  tobacco,  or  any  substitute  therefor,  made 
in  or  imported  into  the  United  States,  and  weighing  not  more 
than  three  pounds  per  thousand,  80  cents  per  thousand ;  weigh- 
ing more  than  three  pounds  per  thousand,  $1.20  per  thousand. 

Regulations  as  to  Packing  and  Cancellation  of  Stamps 

Every  manufacturer  of  cigarettes  (including  small  cigars 
weighing  not  more  than  three  pounds  per  thousand)  shall  put 
up  all  the  cigarettes  and  such  small  cigars  that  he  manufactures 
or  has  manufactured  for  him,  and  sells  or  removes  for  consump- 
tion or  use,  in  packages  or  parcels  containing  five,  eight,  ten, 
twelve,  fifteen,  sixteen,  twenty,  twenty-four,  forty,  fifty,  eighty, 
or  one  hundred  cigarettes  each,  and  shall  securely  affix  to  each 
of  said  packages  or  parcels  a  suitable  stamp  denoting  the  tax 
thereon  and  shall  properly  cancel  the  same  prior  to  such  sale  or 
removal  for  consumption  or  use  under  such  regulations  as  the 
Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  shall  prescribe ;  and  all  cigarettes  im- 
ported from  a  foreign  country  shall  be  packed,  stamped,  and  the 
stamps  cancelled  in  a  like  manner,  in  addition  to  the  import 
stamp  indicating  inspection  of  the  custom-house  before  they  are 
withdrawn  therefrom. 

Tobacco  and  Snuff 

Section  401.  That  upon  all  tobacco,  and  snuff  hereafter 
manufactured  and  sold,  or  removed  for  consumption  or  use,  there 
shall  be  levied  and  collected,  in  addition  to  the  tax  now  imposed 
by  law  upon  such  articles,  a  tax  of  5  cents  per  pound,  to  be 
levied,  collected,  and  paid  under  the  provisions  of  existing  law. 

In  addition  to  the  packages  provided  for  under  existing  law, 
manufactured  tobacco  and  snuff  may  be  put  up  and  prepared  by 


THE  FEDERAL  WAR  TAX   LAW,   1917  35 

the  manufacturer  for  sale  or  consumption,  in  packages  of  the 
following  description :  Packages  containing  one-eighth,  three- 
eighths,  five-eighths,  seven-eighths,  one  and  one-eighth,  one  and 
three-eighths,  one  and  five-eighths,  one  and  seven-eighths,  and 
five  ounces. 

Sections  400-1  Effective  Nov.  2,  1917 

Section  402.  That  sections  four  hundred,  four  hundred  and 
one,  and  four  hundred  and  four,  shall  take  effect  thirty  days  after 
the  passage  of  this  Act :  Provided,  That  after  the  passage  of  this 
Act  and  before  the  expiration  of  the  aforesaid  thirty  days, 
cigarettes  and  manufactured  tobacco  and  snuff  may  be  put  up  in 
the  packages  now  provided  for  by  law  or  in  the  packages  pro- 
vided for  in  sections  four  hundred  and  four  hundred  and  one. 

Floor  Stock  Tax 

Section  403.  That  there  shall  also  be  levied  and  collected, 
upon  all  manufactured  tobacco  and  snuff  in  excess  of  one  hundred 
pounds  or  upon  cigars  or  cigarettes  in  excess  of  one  thousand, 
which  were  manufactured  or  imported,  and  removed  from  factory 
or  custom  house  prior  to  the  passage  of  this  Act,  bearing  tax- 
paid  stamps  affixed  to  such  articles  for  the  payment  of  the  taxes 
thereon,  and  which  are,  on  the  day  after  this  Act  is  passed,  held 
and  intended  for  sale  by  any  person,  corporation,  partnership, 
or  association,  and  upon  all  manufactured  tobacco,  snuff,  cigars, 
or  cigarettes,  removed  from  factory  or  custom  house  after  the 
passage  of  this  Act  but  prior  to  the  time  when  the  tax  imposed 
by  section  four  hundred  or  section  four  hundred  and  one  upon 
such  articles  takes  effect,  an  additional  tax  equal  to  one-half  the 
tax  imposed  by  such  sections  upon  such  articles. 

Cigarette  Paper 

Section  404.  That  there  shall  be  levied,  assessed,  and  col- 
lected upon  cigarette  paper  made  up  into  packages,  books,  sets, 
or  tubes,  made  up  in  or  imported  into  the  United  States  and  in- 
tended for  use  by  the  smoker  in  making  cigarettes  the  following 
taxes :  On  each  package,  book,  or  set,  containing  more  than 
twenty-five  but  not  more  than  fifty  papers,  one-half  of  1  cent ; 
containing  more  than  fifty  but  not  more  than  one  hundred  papers, 

1  cent ;  containing  more  than  one  hundred  papers,  1  cent  for  each 
one  hundred  papers  or  fractional  part  thereof;  and  upon  tubes, 

2  cents  for  each  one  hundred  tubes  or  fractional  part  thereof. 

TITLE  V.    WAR  TAX  ON  FACILITIES  FURNISHED  BY 
PUBLIC  UTILITIES,  AND  INSURANCE 

Rail  or  Water  Freight  Transportation  Tax 

Section  500.  That  from  and  after  the  first  day  of  November, 
ninteen  hundred  and  seventeen,  there  shall  be  levied,  assessed, 
collected,  and  paid  (a)  a  tax  equivalent  to  three  per  centum 


36  THE  FEDERAL  WAR  TAX  LAW,   1917 

of  the  amount  paid  for  the  transportation  by  rail  or  water  or  by 
any  form  of  mechanical  motor  power  when  in  competition  with 
carriers  by  rail  or  water  of  property  by  freight  consigned  from 
one  point  in  the  United  States  to  another ; 

Tax  on  Express  Transportation 

(b)  a  tax  of  1  cent  for  each  20  cents,  or  fraction  thereof,  paid 
to  any  person,  corporation,  partnership,  or  association,  engaged 
in  the  business  of  transporting  parcels  or  packages  by  express 
over  regular  routes  between  fixed  terminals,  for  the  transporta- 
tion of  any  package,  parcel,  or  shipment  by  express  from  one 
point  in  the  United  States  to  another:    Provided,  That  nothing 
herein  contained  shall  be  construed  to  require  the  carrier  col- 
lecting such  tax  to  list  separately  in  any  bill  of  lading,  freight 
receipt,  or  other  similar  document,  the  amount  of  the  tax  herein 
levied,  if  the  total  amount  of  the  freight  and  tax  be  therein 
stated ; 

Tax  on  Transportation  of  Persons  by  Rail  or  Water 

(c)  a  tax  equivalent  to  eight  per  centum  of  the  amount  paid 
for  the  transportation  of  persons  by  rail  or  water,  or  by  any  form 
of  mechanical  motor  power  on  a  regular  established  line  when 
in  competition  with  carriers  by  rail  or  water,  from  one  point  in 
the  United   States  to   another  or  in   any  point  in   Canada   or 
Mexico,  where  the  ticket  therefor  is  sold  or  issued  in  the  United 
States,  not  including  the  amount  paid  for  computation  or  season 
tickets  for  trips  less  than  thirty  miles,  or  for  transportation  the 
fare  for  which  does  not  exceed  35  cents,  and  a  tax  equivalent  to 
ten  per  centum  of  the  amount  paid  for  seats,  berths,  and  state- 
rooms in  parlor  cars,  sleeping  cars,  or  on  vessels.     If  a  mileage 
book  used  for  such  transportation  or  accommodation  has  been 
purchased  before  this  section  takes  effect,  or  if  cash  fare  be  paid, 
the  tax  imposed  by  this  section  shall  be  collected  from  the  person 
presenting  the  mileage  book,  or  paying  the  cash  fare,  by  the  con- 
ductor or  other  agent,  when  presented  for  such  transportation  or 
accommodation,  and  the  amount  so  collected  shall  be  paid  to  the 
United  States  in  such  manner  and  at  such  times  as  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary 
of  the  Treasury,  may  prescribe ;  if  a  ticket  (other  than  a  mileage 
book)  is  bought  and  partially  used  before  this  section  goes  into 
effect  it  shall  not  be  taxed,  but  if  bought  but  not  so  used  before 
this  section  takes  effect,  it  shall  not  be  valid  for  passage  until 
the  tax  has  been  paid  and  such  payment  evidenced  on  the  ticket 
in  such  manner  as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  may  by  regulation 
prescribe ; 


THE  FEDERAL  WAR  TAX  LAW,   1917  37 

Tax  on  Telephone,  Telegraph  or  Radio  Communications  and 
Pipe  Line  Transportation 

(d)  a  tax  equivalent  to  five  per  centum  of  the  amount  paid 
for  the  transportation  of  oil  by  pipe  line;  (e)  a  tax  of  5  cents 
upon  each  telegraph,  telephone,  or  radio,  dispatch,  message,  or 
conversation,  which  originates  within  the  United  States,  and 
for  the  transmission  of  which  a  charge  of  15  cents  or  more  is 
imposed:  Provided,  That  only  one  payment  of  such  tax  shall 
be  required,  notwithstanding  the  lines  or  stations  of  one  or  more 
persons,  corporations,  partnerships,  or  associations,  shall  be  used 
for  the  tranmission  of  such  dispatch,  message,  or  conversation. 

Payor  for  Services  to  Pay  Said  Taxes 

Section  501.  That  the  taxes  imposed  by  section  five  hundred 
shall  be  paid  by  the  person,  corporation,  partnership,  or  associa- 
tion paying  for  the  services  or  facilities  rendered. 

Tax  on  Transportation  of  Carriers'  Own  Commodities 

In  case  such  carrier  does  not,  because  of  its  ownership  of  the 
commodity  transported,  or  for  any  other  reason,  receive  the 
amount  which  as  a  carrier  it  would  otherwise  charge,  such  car- 
rier shall  pay  a  tax  equivalent  to  the  tax  which  would  be  im- 
posed upon  the  transportation  of  such  commodity  if  the  carrier 
received  payment  for  such  transportation:  Provided,  That  in 
case  of  a  carrier  which  on  May  first,  nineteen  hundred  and  seven- 
teen, had  no  rates  or  tariff  on  file  with  the  proper  Federal  or 
State  authority,  the  tax  shall  be  computed  on  the  basis  of  the 
rates  or  tariffs  of  other  carriers  for  like  services  as  ascertained 
and  determined  by  the  Commissioner  of  Internal  Revenue: 
Provided  further,  That  nothing  in  this  or  the  preceding  section 
shall  be  construed  as  imposing  a  tax  (a)  upon  the  transportation 
of  any  commodity  which  is  necessary  for  the  use  of  the  carrier 
in  the  conduct  of  its  business  as  such  and  is  intended  to  be  so 
used  or  has  been  so  used;  or  (b)  upon  the  transportation  of  com- 
pany material  transported  by  one  carrier,  which  constitutes  a 
part  of  a  railroad  system,  for  another  carrier  which  is  also  a 
part  of  the  same  system. 

Exemptions 

Section  502.  That  no  tax  shall  be  imposed  under  section  five 
hundred  upon  any  payment  received  for  services  rendered  to  the 
United  States,  or  any  State,  Territory,  or  the  District  of  Colum- 
bia. The  right  to  exemption  under  this  section  shall  be  evi- 
denced in  such  manner  as  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  may  by  regu- 
lation prescribe. 

Collections  and  Returns 

Section  503.  That  each  person,  corporation,  partnership,  or 
association  receiving  any  payments  referred  to  in  section  five 
hundred  shall  collect  the  amount  of  the  tax,  if  any,  imposed  by 


38  THE  FEDERAL  WAR  TAX  LAW,   1917 

such  section  from  the  person,  corporation,  partnership,  or  associa- 
tion making  such  payments,  and  shall  make  monthly  returns 
under  oath,  in  duplicate,  and  pay  the  taxes  so  collected  and  the 
taxes  imposed  upon  it  under  paragraph  two  of  section  five  hun- 
dred and  one  to  the  collector  of  internal  revenue  of  the  district 
in  which  the  principal  office  or  place  of  business  is  located.  Such 
returns  shall  contain  such  information,  and  be  made  in  such 
manner,  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  by  regulation 
prescribe. 

Tax  on  Issuance  of  Insurance  Policies 

Section  504.  That  from  and  after  the  first  day  of  November, 
nineteen  hundred  and  seventeen,  there  shall  be  levied,  assessed, 
collected,  and  paid  the  following  taxes  on  the  issuance  of  insur- 
ance policies : 

Life  Insurance 

(a)  Life  Insurance:    A  tax  equivalent  to  8  cents  on  each 
$100  or  fractional  part  thereof  of  the  amount  for  which  any  life 
is  insured  under  any  policy  of  insurance,  or  other  instrument, 
by  whatever  name  the  same  is  called :     Provided,  That  on  all 
policies  for  life  insurance  only  by  which  a  life  is  insured  not  in 
excess  of  $500,  issued  on  the  industrial  or  weekly-payment  plan 
of  insurance,  the  tax  shall  be  forty  per  centum  of  the  amount  of 
the  first  weekly  premium :     Provided  further,  That  policies  of 
reinsurance  shall  be  exempt  from  the  tax  imposed  by  this  sub- 
division ; 

Marine,  Fire  and  Inland  Insurance 

(b)  Marine,  inland,  and  fire  insurance :    A  tax  equivalent  to 
1  cent  on  each  dollar  or  fractional  part  thereof  of  the  premium 
charged  under  each  policy  of  insurance  or  other  instrument  by 
whatever  name  the  same  is  called  whereby  insurance  is  made  or 
renewed  upon  property  of  any  description   (including  rents  or 
profits),  whether  against  peril  by  sea  or  inland  waters,  or  by  fire 
or  lightning,  or  other  peril :     Provided,  That  policies  of  reinsur- 
ance shall  be  exempt  from  the  tax  imposed  by  this  subdivision ; 

Casualty  Insurance 

(c)  Casualty  insurance :    A  tax  equivalent  to  1  cent  on  each 
dollar  or  fractional  part  thereof  of  the  premium  charged  under 
each  policy  of  insurance  or  obligation  of  the  nature  of  indemnity 
for  loss,  damage  or  liability  (except  bonds  taxable  under  sub- 
division two  of  schedule  A  of  Title  VIII)  issued  or  executed  or 
renewed  by  any  person,  corporation,  partnership,  or  association, 
transacting  the  business  of  employer's  liability,  workmen's  com- 
pensation, accident,  health,  tornado,  plate  glass,  steam  boiler,  ele- 
vator, burglary,  automatic  sprinkler,  automobile,  or  other  branch 
of  insurance  (except  life  insurance,  and  insurance  described  and 
taxed  in  the  preceding  subdivision):    Provided,  That  policies  of 


THE  FEDERAL  WAR  TAX  LAW,   1917  39 

reinsurance  shall  be  exempt  from  the  tax  imposed  by  this  subdi- 
vision ; 

Exemptions 

(d)  Policies  issued  by  any  person,  corporation,  partnership, 
or  association,  whose  income  is  exempt  from  taxation  under  Title 
I  of  the  Act  entitled  "An  Act  to  increase  the  revenue,  and  for 
other  purposes,"  approved  September  eighth,  nineteen  hundred 
and  sixteen,1  shall  be  exempt  from  the  taxes  imposed  by  this 
section. 

Return  Regulations 

Section  505.  That  every  person,  corporation,  partnership,  or 
association,  issuing  policies  of  insurance  upon  the  issuance  of 
which  a  tax  is  imposed  by  section  five  hundred  and  four,  shall, 
within  the  first  fifteen  days  of  each  month,  make  a  return  under 
oath,  in  duplicate  and  pay  such  tax  to  the  collector  of  internal 
revenue  of  the  district  in  which  the  principal  office  or  place  of 
business  of  such  person,  corporation,  partnership,  or  association 
is  located.  Such  returns  shall  contain  such  information  and  be 
made  in  such  manner  as  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  may  by  regu- 
lation prescribe. 

TITLE  VI.    WAR  EXCISE  TAXES 
Automobiles  Sold  by  Manufacturer  or  Importer 

Section  600.  That  there  shall  be  levied,  assessed,  collected, 
and  paid — 

(a)  Upon  all  automobiles,  automobile  trucks,  automobile 
wagons,  and  motorcycles,  sold  by  the  manufacturer,  producer,  or 
importer,  a  tax  equivalent  to  three  per  centum  of  the  price  for 
which  so  sold; 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  4.  The  following  in- 
come shall  be  exempt  from  the  provisions  of  this  title: 

The  proceeds  of  life  insurance  policies  paid  to  individual  bene- 
ficiaries upon  the  death  of  the  insured;  the  amount  received  by  the  in- 
sured, as  a  return  of  premium  or  premiums  paid  by  him  under  life 
insurance,  endowment,  or  annuity  contracts,  either  during  the  term  or 
at  the  maturity  of  the  term  mentioned  in  the  contract  or  upon  the 
surrender  of  the  contract;  the  value  of  property  acquired  by  gift,  bequest, 
devise,  or  descent  (but  the  income  from  such  property  shall  be  included 
as  income);  interest  upon  the  obligations  of  a  State  or  any  political 
subdivision  thereof  or  upon  the  obligations  of  the  United  States  or  its 
possessions  or  securities  issued  under  the  provisions  of  the  Federal 
farm  loan  Act  of  July  seventeenth,  nineteen  hundred  and  sixteen;  the 
compensation  of  the  present  President  of  the  United  States  during  the 
term  for  which  he  has  been  elected,  and  the  judges  of  the  Supreme  and 
inferior  courts  of  the  United  States  now  in  office,  and  the  compensation 
of  all  officers  and  employees  of  a  State,  or  any  political  subdivision 
thereof,  except  when  such  compensation  is  paid  by  the  United  States 
Government. 


40  THE  FEDERAL  WAR  TAX  LAW,   1917 

Musical  Instruments  and  Machines 

(b)  Upon  all  piano  players,  grap'hophones,  phonographs, 
talking   machines,    and    records    used    in    connection    with    any 
musical  instrument,  piano  player,  graphophone,  phonograph,  or 
talking  machine,  sold  by  the  manufacturer,  producer,  or  importer, 
a  tax  equivalent  to  three  per  centum  of  the  price  for  which  so 
sold; 

Moving  Picture  Films 

(c)  Upon  all  moving-picture  films  (which  have  not  been 
exposed)  sold  by  the  manufacturer  or  importer  a  tax  equivalent 
to  one-fourth  of  1  cent  per  linear  foot ;  and 

(d)  Upon  all  positive  moving-picture  films   (containing  a 
picture  ready  for  projection)  sold  or  leased  by  the  manufacturer, 
producer,  or  importer,  a  tax  equivalent  to  one-half  of  1  cent  per 
linear  foot;  and 

Jewelry 

(e)  Upon  any  article  commonly  or  commercially  known  as 
jewelry,  whether  real  or  imitation,  sold  by  the  manufacturer, 
producer,   or   importer  thereof,   a  tax   equivalent  to  three  per 
centum  of  the  price  for  which  so  sold ;  and 

Sporting  Goods,  Etc. 

(f)  Upon  all  tennis  rackets,  golf  clubs,  baseball  bats,  la- 
crosse sticks,  balls  of  all  kinds,  including  baseballs,  footballs, 
tennis,  golf,  lacrosse,  billiard  and  pool  balls,  fishing  rods  and  reels, 
billiard  and  pool  tables,  chess  and  checker  boards  and  pieces,  dice, 
games  and  parts  of  games,  except  playing  cards  and  children's 
toys  and  games,  sold  by  the  manufacturer,  producer,  or  importer, 
a  tax  equivalent  to  three  per  centum  of  the  price  for  which  so 
sold;  and 

Toilet  Articles 

(g)  Upon   all  perfumes,   essences,   extracts,  toilet  waters, 
cosmetics,  petroleum  jellies,  hair  oils,  pomades,  hair  dressings, 
hair  restoratives,  hair  dyes,  tooth  and  mouth  washes,  dentifrices, 
tooth  pastes,  aromatic  cachous,  toilet  soaps  and  powders,  or  any 
similar  substance,  article,  or  preparation  by  whatsoever  name 
known  or  distinguished,  upon  all  of  the  above  which  are  used  or 
applied  or  intended  to  be  used  or  applied  for  toilet  purposes,  and 
which  are  sold  by  the  manufacturer,  importer,  or  producer,  a  tax 
equivalent  to  two  per  centum  of  the  price  for  which  so  sold ;  and 

Drugs,  Patent  Medicines  and  Preparations,  Etc. 

(h)  Upon  all  pills,  tablets,  powders,  tinctures,  troches  or 
lozenges,  sirups,  medicinal  cordials  or  bitters,  anodynes,  tonics, 
plasters,  liniments,  salves,  ointments,  pastes,  drops,  waters  (ex- 
cept those  taxed  under  section  three  hundred  and  thirteen  of  this 
Act),  essences,  spirits,  oils,  and  all  medicinal  preparations,  com- 
pounds, or  compositions  whatsoever,  the  manufacturer  or  pro- 


THE  FEDERAL  WAR  TAX   LAW,   1917  41 

ducer  of  which  claims  to  have  any  private  formula,  secret,  or 
occult  art  for  making  or  preparing  the  same,  or  has  or  claims  to 
have  any  exclusive  right  or  title  to  the  making  or  preparing  the 
same,  or  which  are  prepared,  uttered,  vended,  or  exposed  for  sale 
under  any  letters  patent,  or  trade-mark,  or  which,  if  prepared  by 
any  formula,  published  or  unpublished,  are  held  out  or  recom- 
mended to  the  public  by  the  makers,  venders,  or  proprietors 
thereof  as  proprietary  medicines  or  medicinal  proprietary  articles 
or  preparations,  or  as  remedies  or  specifics  for  any  disease,  dis- 
eases, or  affection  whatever  affecting  the  human  or  animal  body, 
and  which  are  sold  by,  the  manufacturer,  producer,  or  importer,  a 
tax  equivalent  to  two  per  centum  of  the  price  for  which  so  sold ; 
and 

Chewing  Gum 

(i)  Upon  all  chewing  gum  or  substitute  therefor  sold  by  the 
manufacturer,  producer,  or  importer,  a  tax  equivalent  to  two  per 
centum  of  the  price  for  which  so  sold ;  and 

Cameras 

(j)  Upon  all  cameras  sold  by  the  manufacturer,  producer,  or 
importer,  a  tax  equivalent  to  three  per  centum  of  the  price  for 
which  so  sold. 

Returns 

Section  601.  That  each  manufacturer,  producer,  or  importer 
of  any  of  the  articles  enumerated  in  section  six  hundred  shall 
make  monthly  returns  under  oath  in  duplicate  and  pay  the  taxes 
imposed  on  such  articles  by  this  title  to  the  collector  of  internal 
revenue  for  the  district  in  which  is  located  the  principal  place  of 
business.  Such  returns  shall  contain  such  information  and  be 
made  at  such  times  and  in  such  manner  as  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  may  by  regulations  prescribe. 

Stock  on  Hand 

Section  602.  That  upon  all  articles  enumerated  in  subdivi- 
sions (a),  (b),  (e),  (f),  (g),  (h),  (i),  or  (j)  of  section  six  hun- 
dred, which  on  the  day  this  Act  is  passed  are  held  and  intended 
for  sale  by  any  person,  corporation,  partnership,  or  association, 
other  than  (1)  a  retailer  who  is  not  also  a  wholesaler,  or  (2)  the 
manufacturer,  producer,  or  importer  thereof,  there  shall  be  levied, 
assessed,  collected,  and  paid  a  tax  equivalent  to  one-half  the  tax 
imposed  by  each  such  subdivision  upon  the  sale  of  the  articles 
therein  enumerated.  This  tax  shall  be  paid  by  the  person,  cor- 
poration, partnership,  or  association  so  holding  such  articles. 

The  taxes  imposed  by  this  section  shall  be  assessed,  col- 
lected, and  paid  in  the  same  manner  as  provided  in  section  ten 
hundred  and  two  in  the  case  of  additional  taxes  upon  articles 
upon  which  the  tax  imposed  by  existing  law  has  been  paid. 

Nothing  in  this  section  shall  be  construed  to  impose  a  tax 


42  THE  FEDERAL  WAR  TAX  LAW,   1917 

upon  articles  sold  and  delivered  prior  to  May  ninth,  nineteen 
hundred  and  seventeen,  where  the  title  is  reserved  in  the  vendor 
as  security  for  the  payment  of  the  purchase  money. 

Boats,  Yachts,  Etc. 

Section  603.  That  on  the  day  this  Act  takes  effect,  and 
thereafter  on  July  first  in  each  year,  and  also  at  the  time  of  the 
original  purchase  of  a  new  boat  by  a  user,  if  on  any  other  date 
than  July  first,  there  shall  be  levied,  assessed,  collected,  and  paid 
upon  the  use  of  yachts,  pleasure  boats,  power  boats,  and  sailing 
boats,  of  over  five  net  tons,  and  motor  boats  with  fixed  engines, 
not  used  exclusively  for  trade  or  national  defense,  or  not  built 
according  to  plans  and  specifications  approved  by  the  Navy 
Department,  an  excise  tax  to  be  based  on  each  yacht  or  boat,  at 
rates  as  follows :  Yachts,  pleasure  boats,  power  boats,  motor 
boats  with  fixed  engines,  and  sailing  boats,  of  over  five  net  tons, 
length  not  over  fifty  feet,  50  cents  for  each  foot,  length  over  fifty 
feet  and  not  over  one  hundred  feet,  $1  for  each  foot,  length  over 
one  hundred  feet,  $2  for  each  foot ;  motor  boats  of  not  over  five 
net  tons  with  fixed  engines,  $5. 

In  determining  the  length  of  such  yachts,  pleasure  boats, 
power  boats,  motor  boats  with  fixed  engines,  and  sailing  boats, 
the  measurement  of  over-all  length  shall  govern. 

In  the  case  of  a  tax  imposed  at  the  time  of  the  original  pur- 
chase of  a  new  boat  on  any  other  date  than  July  first,  the  amount 
to  be  paid  shall  be  the  same  number  of  twelfths  of  the  amount 
of  the  tax  as  the  number  of  calendar  months,  including  the  month 
of  sale,  remaining  prior  to  the  following  July  first. 

TITLE  VII.    WAR  TAX  ON  ADMISSIONS  AND  DUES 
Admission  Tax 

Section  700.  That  from  and  after  the  first  day  of  November, 
nineteen  hundred  and  seventeen,  there  shall  be  levied,  assessed, 
collected,  and  paid  (a)  a  tax  of  1  cent  for  each  10  cents  or  frac- 
tion thereof  of  the  amount  paid  for  admission  to  any  place,  in- 
cluding admission  by  season  ticket  or  subscription,  to  be  paid  by 
the  person  paying  for  such  admission :  Provided,  That  the  tax 
on  admission  of  children  under  twelve  years  of  age  where  an 
admission  charge  for  such  children  is  made  shall  in  every  case  be 
1  cent;  and  (b)  in  the  case  of  persons  (except  bona  fide  em- 
ployees, municipal  officers  on  official  business,  and  children  under 
twelve  years  of  age)  admitted  free  to  any  place  at  a  time  when 
and  under  circumstances  under  which  an  admission  charge  is 
made  to  other  persons  of  the  same  class,  a  tax  of  1  cent  for  each 
10  cents  or  fraction  thereof  of  the  price  so  charged  to  such  other 
persons  for  the  same  or  similar  accommodations,  to  be  paid  by 
the  person  so  admitted ;  and  (c)  a  tax  of  1  cent  for  each  10  cents 
or  fraction  thereof  paid  for  admission  to  any  public  performance 
for  profit  at  any  cabaret  or  other  similar  entertainment  to  which 


THE  FEDERAL  WAR  TAX  LAW,   1917  43 

the  charge  for  admission  is  wholly  or  in  part  included  in  the 
price  paid  for  refreshment,  service,  or  merchandise ;  the  amount 
paid  for  such  admission  to  be  computed  under  rules  prescribed 
by  the  Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  such  tax  to  be  paid  by  the  person 
paying  for  such  refreshment,  service,  or  merchandise.  In  the 
case  of  persons  having  the  permanent  use  of  boxes  or  seats  in 
an  opera  house  or  any  place  of  amusement  or  a  lease  for  the 
use  of  such  box  or  seat  in  such  opera  house  or  place  of  amuse- 
ment there  shall  be  levied,  assessed,  collected,  and  paid  a  tax 
equivalent  to  ten  per  centum  of  the  amount  for  which  a  similar 
box  or  seat  is  sold  for  performance  or  exhibition  at  which  the 
box  or  seat  is  used  or  reserved  by  or  for  the  lessee  or  holder. 
These  taxes  shall  not  be  imposed  in  the  case  of  a  place  the  maxi- 
mum charge  for  admission  to  which  is  5  cents,  or  in  the  case  of 
shows,  rides,  and  other  amusements  (the  maximum  charge  for 
admission  to  which  is  10  cents),  within  outdoor  general  amuse- 
ment parks,  or  in  the  case  of  admissions  to  such  parks. 

No  tax  shall  be  levied  under  this  title  in  respect  to  any  ad- 
missions all  the  proceeds  of  which  inure  exclusively  to  the  benefit 
of  religious,  educational,  or  charitable  institutions,  societies,  or 
organizations,  or  admissions  to  agricultural  fairs  none  of  the 
profits  of  which  are  distributed  to  stockholders  or  members  of 
the  association  conducting  the  same. 

Admission  Defined 

The  term  "admission"  as  used  in  this  title  includes  seats  and 
tables,  reserved  or  otherwise,  and  other  similar  accommodations, 
and  the  charges  made  therefor. 

Tax  on  Club  Dues  and  Fees 

Section  701.  That  from  and  after  the  first  day  of  November, 
nineteen  hundred  and  seventeen,  there  shall  be  levied,  assessed, 
collected,  and  paid,  a  tax  equivalent  to  ten  per  centum  of  any 
amount  paid  as  dues  or  membership  fees  (including  initiation 
fees),  to  any  social,  athletic,  or  sporting  club  or  organization, 
where  such  dues  or  fees  are  in  excess  of  $12  per  year ;  such  taxes 
to  be  paid  by  the  person  paying  such  dues  or  fees :  Provided, 
That  there  shall  be  exempted  from  the  provisions  of  this  section 
all  amounts  paid  as  dues  or  fees  to  a  fraternal  beneficiary  society, 
order,  or  association,  operating  under  the  lodge  system  or  for 
the  exclusive  benefit  of  the  members  of  a  fraternity  itself  operat- 
ing under  the  lodge  system,  and  providing  for  the  payment  of 
life,  sick,  accident,  or  other  benefits  to  the  members  of  such 
society,  order,  or  association  or  their  dependents. 

Returns 

Section  702.  That  every  person,  corporation,  partnership,  or 
association  (a)  receiving  any  payments  for  such  admission,  dues, 
or  fees  shall  collect  the  amount  of  the  tax  imposed  by  section 


44  THE  FEDERAL  WAR  TAX  LAW,   1917 

seven  hundred  or  seven  hundred  and  one  from  the  person  making 
such  payments,  or  (b)  admitting  any  person  free  to  any  place 
for  admission  to  which  a  charge  is  made  shall  collect  the  amount 
of  the  tax  imposed  by  section  seven  hundred  from  the  person 
so  admitted;  and  (c)  in  either  case  shall  make  returns  and  pay- 
ments of  the  amount  so  collected,  at  the  same  time  and  in  the 
same  manner  as  provided  in  section  five  hundred  and  three  of  this 
Act. 

TITLE  VIII.    WAR  STAMP  TAXES 
Bonds,  Debentures,  Etc. 

Section  800.  That  on  and  after  the  first  day  of  December, 
nineteen  hundred  and  seventeen,  there  shall  be  levied,  collected, 
and  paid,  for  and  in  respect  of  the  several  bonds,  debentures,  or 
certificates  of  stock  and  of  indebtedness,  and  other  documents,  in- 
struments, matters,  and  things  mentioned  and  described  in 
Schedule  A  of  this  title,  or  for  or  in  respect  of  the  vellum,  parch- 
ment, or  paper  upon  which  such  instruments,  matters,  or  things, 
or  any  of  them,  are  written  or  printed,  by  any  person,  corporation, 
partnership,  or  association  who  makes,  signs,  issues,  sells,  re- 
moves, consigns,  or  ships  the  same,  or  for  whose  use  or  benefit 
the  same  are  made,  signed,  issued,  sold,  removed,  consigned,  or 
shipped,  the  several  taxes  specified  in  such  schedule. 

Exceptions 

Section  801.  That  there  shall  not  be  taxed  under  this  title 
any  bond,  note,  or  other  instrument,  issued  by  the  United  States, 
or  by  any  foreign  government,  or  by  any  State,  Territory,  or  the 
District  of  Columbia,  or  local  subdivision  thereof,  or  municipal 
or  other  corporation  exercising  the  taxing  power,  when  issued  in 
the  exercise  of  a  strictly  governmental,  taxing,  or  municipal 
function ;  or  stocks  and  bonds  issued  by  co-operative  building 
and  loan  associations  which  are  organized  and  operated  exclu- 
sively for  the  benefit  of  their  members  and  make  loans  only  to 
their  shareholders,  or  by  mutual  ditch  or  irrigating  companies. 

PENALTY  FOR  VIOLATIONS  OF  STAMP  TAX 
PROVISIONS 

Penalty  for  Failure  to  Affix  Stamps  or  Cancel  Same 

Section  802.    That  whoever — 

(a)  Makes,  signs,  issues,  or  accepts,  or  causes  to  be  made, 
signed,  issued,  or  accepted,  any  instrument,  document,  or  paper 
of  any  kind  or  description  whatsoever  without  the  full  amount 
of  tax  thereon  being  duly  paid ; 

(b)  Consigns  or  ships,  or  causes  to  be  consigned,  or  shipped, 
by  parcel  post  any  parcel,  package,  or  article  without  the  full 
amount  of  tax  being  duly  paid ; 

(c)  Manufactures  or  imports  and  sells,  or  offers  for  sale,  or 
causes  to  be  manufactured  or  imported  and  sold,  or  offered  for 


THE  FEDERAL  WAR  TAX  LAW,   1917  45 

sale,  any  playing  cards,  package,  or  other  article  without  the  full 
amount  of  tax  being  duly  paid ; 

(d)  Makes  use  of  any  adhesive  stamp  to  denote  any  tax  im- 
posed by  this  title  without  canceling  or  obliterating  such  stamp 
as  prescribed  in  section  eight  hundred  and  four ; 

Is  guilty  of  a  misdemeanor  and  upon  conviction  thereof  shall 
pay  a  fine  of  not  more  than  $100  for  each  offense. 

Penalty  for  Fraudulent  Use  of  Stamps,  Dies  or  Plates 

Section  803.    That  whoever — 

(a)  Fraudulently  cuts,  tears,  or  removes  from  any  vellum, 
parchment,  paper,  instrument,  writing,  package,  or  article,  upon 
which  any  tax  is  imposed  by  this  title,  any  adhesive  stamp  or  the 
impression  of  any  stamp,  die,  plate,  or  other  article  provided, 
made,  or  used  in  pursuance  of  this  title ; 

(b)  Fraudulently  uses,  joins,  fixes,  or  places  to,  with,  or 
upon  any  vellum,  parchment,  paper,  instrument,  writing,  package, 
or  article,  upon  which  any  tax  is  imposed  by  this  title,  (1)  any 
adhesive  stamp,  or  the  impression  of  any  stamp,  die,  plate,  or 
other  article,  which  has  been  cut,  torn,  or  removed  from  any  other 
vellum,  parchment,  paper,  instrument,  writing,  package,  or  article, 
upon  which  any  tax  is  imposed  by  this  title;  or  (2)  any  adhesive 
stamp   or   the   impression   of  any   stamp,   die,   plate,   or   other 
article  of  insufficient  value;  or   (3)   any  forged  or  counterfeit 
stamp,  or  the  impression  of  any  forged  or  counterfeited  stamp, 
die,  plate,  or  other  article; 

(c)  Willfully  removes,  or  alters  the  cancellation,  or  defacing 
marks  of,  or  otherwise  prepares,  any  adhesive  stamp,  with  intent 
to  use,  or  cause  the  same  to  be  used,  after  it  has  been  already 
used,  or  knowingly  or  willfully  buys,  sells,  offers  for  sale,  or 
gives  away,  any  such  washed  or  restored  stamp  to  any  person  for 
use,  or  knowingly  uses  the  same ; 

(d)  Knowingly  and  without  lawful  excuse  (the  burden  of 
proof  of  such  excuse  being  on  the  accused)  has  in  possession  any 
washed,  restored,  or  altered   stamp,  which  has  been  removed 
from  any  vellum,  parchment,  paper,  instrument,  writing,  package, 
or  article,  is  guilty  of  a  misdemeanor,  and  upon  conviction  shall 
be  punished  by  a  fine  of  not  more  than  $1,000,  or  by  imprisonment 
for  not  more  than  five  years,  or  both,  in  the  discretion  of  the 
court,  and  any  such  reused,  canceled,  or  counterfeit  stamp  and 
the  vellum,  parchment,  document,  paper,  package,  or  article  upon 
which  it  is  placed  or  impressed  shall  be  forfeited  to  the  United 
States. 

Adhesive  Stamp  Regulations 

Section  804.  That  whenever  an  adhesive  stamp  is  used  for 
denoting  any  tax  imposed  by  this  title,  except  as  hereinafter 
provided,  the  person,  corporation,  partnership,  or  association, 
using  or  affixing  the  same  shall  write  or  stamp  or  cause  to  be 
written  or  stamped  thereupon  the  initials  of  his  or  its  name  and 
the  date  upon  which  the  same  is  attached  or  used,  so  that  the 


46  THE  FEDERAL  WAR  TAX  LAW,   1917 

same  may  not  again  be  used :  Provided,  That  the  Commissioner 
of  Internal  Revenue  may  prescribe  such  other  method  for  the 
cancellation  of  such  stamps  as  he  may  deem  expedient. 

Providing  Stamp  and  Method  of  Affixing  Same 

Section  805.  (a)  That  the  Commissioner  of  Internal 
Revenue  shall  cause  to  be  prepared  and  distributed  for  the  pay- 
ment of  the  taxes  prescribed  in  this  title  suitable  stamps  denoting 
the  tax  on  the  document,  articles,  or  thing  to  which  the  same  may 
be  affixed,  and  shall  prescribe  such  method  for  the  affixing  of 
said  stamps  in  substitution  for  or  in  addition  to  the  method  pro- 
vided in  this  title,  as  he  may  deem  expedient. 

(b)  The  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  is  authorized  to  procure 
any  of  the  stamps  provided  for  in  this  title  by  contract  whenever 
such  stamps  cannot  be  speedily  prepared  by  the  Bureau  of  En- 
graving and  Printing ;  but  this  authority  shall  expire  on  the  first 
day  of  January,  nineteen  hundred  and  eighteen,  except  as  to  im- 
printed stamps  furnished  under  contract,  authorized  by  the  Com- 
missioner of  Internal  Revenue. 

Internal  Revenue  Laws  Extended 

(c)  All  internal-revenue  laws  relating  to  the  assessment  and 
collection  of  taxes  are  hereby  extended  to  and  made  a  part  of  this 
title,  so  far  as  applicable,  for  the  purpose  of  collecting  stamp 
taxes  omitted  through  mistake  or  fraud  from  any  instrument, 
document,    paper,    writing,    parcel,    package,    or    article    named 
herein. 

Stamps  Furnished  Postmaster  General 

Section  806.  That  the  Commissioner  of  Internal  Revenue 
shall  furnish  to  the  Postmaster  General  without  prepayment  a 
suitable  quantity  of  adhesive  stamps  to  be  distributed  to  and 
kept  on  sale  by  the  various  postmasters  in  the  United  States. 
The  Postmaster  General  may  require  each  such  postmaster  to 
give  additional  or  increased  bond  as  postmaster  for  the  value  of 
the  stamps  so  furnished,  and  each  such  postmaster  shall  deposit 
the  receipts  from  the  sale  of  such  stamps  to  the  credit  of  and 
render  accounts  to  the  Postmaster  General  at  such  times  and  in 
such  form  as  he  may  by  regulations  prescribe.  The  Postmaster 
General  shall  at  least  once  monthly  transfer  all  collections  from 
this  source  to  the  Treasury  as  internal-revenue  collections. 

Furnishing  Stamps  to  United  States  Depositories 

Section  807.  That  the  collectors  of  the  several  districts  shall 
furnish  without  prepayment  to  any  assistant  treasurer  or  desig- 
nated depository  of  the  United  States  located  in  their  respective 
collection  districts  a  suitable  quantity  of  adhesive  stamps  for 
sale.  In  such  cases  the  collector  may  require  a  bond,  with  suffi- 
cient sureties,  to  an  amount  equal  to  the  value  of  the  adhesive 


THE  FEDERAL  WAR  TAX   LAW,   1917  47 

stamps  so  furnished,  conditioned  for  the  faithful  return,  when- 
ever so  required,  of  all  quantities  or  amounts  undisposed  of,  and 
for  the  payment  monthly  of  all  quantities  or  amounts  sold  or  not 
remaining  on  hand.  The  Secretary  of  the  Treasury  may  from 
time  to  time  make  such  regulations  as  he  may  find  necessary  to 
insure  the  safe-keeping  or  prevent  the  illegal  use  of  all  such 
adhesive  stamps. 

SCHEDULE  A.     STAMP  TAXES 
Effective  Dec.  1,  1917 

Tax  Rate  on  Bonds,  Debentures  or  Certificates  of  Indebtedness 

1.  Bonds  of  indebtedness:  Bonds,  debentures,  or  certificates 
of  indebtedness  issued  on  and  after  the  first  day  of  December, 
nineteen   hundred   and   seventeen,  by   any  person,   corporation, 
partnership,  or  association,  on  each  $100  of  face  value  or  fraction 
thereof,  5  cents :    Provided,  That  every  renewal  of  the  foregoing 
shall  be  taxed  as  a  new  issue:     Provided  further,  That  when  a 
bond  conditioned  for  the  repayment  or  payment  of  money  is 
given  in  a  penal  sum  greater  than  the  debt  secured,  the  tax  shall 
be  based  upon  the  amount  secured. 

Bond  of  Indemnity  and  Surety 

2.  Bonds,  indemnity  and  surety:     Bonds  for  indemnifying 
any  person,  corporation,  partnership,  or  corporation  who  shall 
have  become  bound  or  engaged  as  surety,  and  all  bonds  for  the 
due  execution  or  performance  of  any  contract,  obligation,  or  re- 
quirement, or  the  duties  of  any  office  or  position,  and  to  account 
for  money  received  by  virtue  thereof,  and  all  other  bonds  of  any 
description,  except  such  as  may  be  required  in  legal  proceedings, 
not  otherwise  provided  for  in  this  schedule,  50  cents :    Provided, 
That  where  a  premium  is  charged  for  the  execution  of  such  bond 
the  tax  shall  be  paid  at  the  rate  of  one  per  centum  on  each  dollar 
or  fractional  part  thereof  of  the  premium  charged :     Provided 
further,  That  policies  of  reinsurance  shall  be  exempt  from  the 
tax  imposed  by  this  subdivision. 

Capital  Stock  Issue 

3.  Capital  stock  issue:     On  each  original  issue,  whether  on 
organization  or  reorganization,  of  certificates  of  stock  by  any 
association,  company,  or  corporation,  on  each  $100  of  face  value 
or  fraction  thereof,  5  cents :    Provided,  That  where  capital  stock 
is  issued  without  face  value,  the  tax  shall  be  5  cents  per  share, 
unless  the  actual  value  is  in  excess  of  $100  per  share,  in  which 
case  the  tax  shall  be  5  cents  on  each  $100  of  actual  value  or 
fraction  thereof. 

The  stamps  representing  the  tax  imposed  by  this  subdivi- 
sion shall  be  attached  to  the  stock  books  and  not  to  the  certifi- 
cates issued. 


48  THE  FEDERAL  WAR  TAX  LAW,   1917 

Sale  or  Transfer  of  Capital  Stock 

4.  Capital  stock,  sales  or  transfers:    On  all  sales,  or  agree- 
ments to  sell,  or  memoranda  of  sales  or  deliveries  of,  or  transfers 
of  legal  title  to  shares  or  certificates  of  stock  in  any  association, 
company,  or  corporation,  whether  made  upon  or  shown  by  the 
books  of  the  association,  company,  or  corporation,  or  by  any 
assignment  in  blank,  or  by  any  delivery,  or  by  any  paper  or 
agreement  or  memorandum  or  other  evidence  of  transfer  or  sale, 
whether  entitling  the  holder  in  any  manner  to  the  benefit  of  such 
stock  or  not,  on  each  $100  of  face  value  or  fraction  thereof,  2 
cents,  and  where  such  shares  of  stock  are  without  par  value,  the 
tax  shall  be  2  cents  on  the  transfer  or  sale  or  agreement  to  sell 
on  each  share,  unless  the  actual  value  thereof  is  in  excess  of 
$100  per  share,  in  which  case  the  tax  shall  be  2  cents  on  each 
$100  of  actual  value  or  fraction  thereof:     Provided,  That  it  is 
not  intended  by  this  title  to  impose  a  tax  upon  an  agreement 
evidencing  a  deposit  of  stock  certificates  as  collateral  security 
for  money  loaned  thereon,  which  stock  certificates  are  not  actu- 
ally sold,  nor  upon  such  stock  certificates  so  deposited:     Pro- 
vided further,  That  the  tax  shall  not  be  imposed  upon  deliveries 
or  transfers  to  a  broker  for  sale,  nor  upon  deliveries  or  transfers 
by  a  broker  to  a  customer  for  whom  and  upon  whose  order  he 
has  purchased  same,  but  such  deliveries  or  transfers  shall  be 
accompanied  by  a  certificate  setting  forth  the  facts:     Provided 
further,  That  in  case  of  sale  where  the  evidence  of  transfer  is 
shown  only  by  the  books  of  the  company  the  stamp  shall  be 
placed  upon  such  books ;  and  where  the  change  of  ownership  is 
by  transfer  of  the  certificate  the  stamp  shall  be  placed  upon  the 
certificate;  and  in  cases  of  an  agreement  to  sell  or  where  the 
transfer  is  by  delivery  of  the  certificate  assigned  in  blank  there 
shall  be  made  and  delivered  by  the  seller  to  the  buyer  a  bill  or 
memorandum  of  such  sale,  to  which  the  stamp  shall  be  affixed ; 
and  every  bill  or  memorandum  of  sale  or  agreement  to  sell  before 
mentioned  shall  show  the  date  thereof,  the  name  of  the  seller, 
the  amount  of  the  sale,  and  the  matter  or  thing  to  which  it  refers. 
Any  person  or  persons  liable  to  pay  the  tax  as  herein  provided, 
or  anyone  who  acts  in  the  matter  as  agent  or  broker  for  such 
person  or  persons  who  shall  make  any  such  sale,  or  who  shall  in 
pursuance  of  any  such  sale  deliver  any  stock  or  evidence  of  the 
sale  of  any  stock  or  bill  or  memorandum  thereof,  as  herein  re- 
quired, without  having  the  proper  stamps  affixed  thereto  with 
intent  to  evade  the  foregoing  provisions  shall  be  deemed  guilty 
of  a  misdemeanor,  and  upon  conviction  thereof  shall  pay  a  fine 
of  not  exceeding  $1,000,  or  be  imprisoned  not  more  than  six 
months,  or  both,  at  the  discretion  of  the  court. 

Sale  of  Produce  on  Exchange 

5.  Produce,  sales  of,  on  exchange:    Upon  each  sale,  agree- 
ment of  sale,  or  agreement  to  sell,  including  so-called  transferred 
or  scratch  sales,  any  products  or  merchandise  at  any  exchange. 


THE  FEDERAL  WAR  TAX   LAW,   1917  49 

or  board  of  trade,  or  other  similar  place,  for  future  delivery,  for 
each  $100  in  value  of  the  merchandise  covered  by  said  sale  or 
agreement  of  sale  or  agreement  to  sell,  2  cents,  and  for  each 
additional  $100  or  fractional  part  thereof  in  excess  of  $100,  2 
cents :  Provided,  That  on  every  sale  or  agreement  of  sale  or 
agreement  to  sell  as  aforesaid  there  shall  be  made  and  delivered 
by  the  seller  to  the  buyer  a  bill,  memorandum,  agreement,  or 
other  evidence  of  such  sale,  agreement  of  sale,  or  agreement  to 
sell,  to  which  there  shall  be  affixed  a  lawful  stamp  or  stamps  in 
value  equal  to  the  amount  of  the  tax  on  such  sale:  Provided 
further,  That  sellers  of  commodities  described  herein,  having  paid 
the  tax  provided  by  this  subdivision,  may  transfer  such  contracts 
to  a  clearing  house  corporation  or  association,  and  such  transfer 
shall  not  be  deemed  to  be  a  sale,  or  agreement  of  sale,  or  an 
agreement  to  sell  within  the  provisions  of  this  Act,  provided  that 
such  transfer  shall  not  vest  any  beneficial  interest  in  such  clear- 
ing house  association  but  shall  be  made  for  the  sole  purpose  of 
enabling  such  clearing  house  association  to  adjust  and  balance 
the  accounts  of  the  members  of  said  clearing  house  association 
on  their  several  contracts.  And  every  such  bill,  memorandum,  or 
other  evidence  of  sale  or  agreement  to  sell  shall  show  the  date 
thereof,  the  name  of  the  seller,  the  amount  of  the  sale,  and  the 
matter  or  thing  to  which  it  refers ;  and  any  person  or  persons 
liable  to  pay  the  tax  as  herein  provided,  or  anyone  who  acts  in 
the  matter  as  agent  or  broker  for  such  person  or  persons,  who 
shall  make  any  such  sale  or  agreement  of  sale,  or  agreement  to 
sell,  or  who  shall,  in  pursuance  of  any  such  sale,  agreement  of 
sale,  or  agreement  to  sell,  deliver  any  such  products  or  mer- 
chandise without  a  bill,  memorandum,  or  other  evidence  thereof 
as  herein  required,  or  who  shall  deliver  such  bill,  memorandum, 
or  other  evidence  of  sale,  or  agreement  to  sell,  without  having 
the  proper  stamps  affixed  thereto,  with  intent  to  evade  the  fore- 
going provisions,  shall  be  deemed  guilty  of  a  misdemeanor,  and 
upon  conviction  thereof  shall  pay  a  fine  of  not  exceeding  $1,000, 
or  be  imprisoned  not  more  than  six  months,  or  both,  at  the  dis- 
cretion of  the  court. 

Exemption 

That  no  bill,  memorandum,  agreement,  or  other  evidence  of 
such  sale,  or  agreement  of  sale,  or  agreement  to  sell,  in  case  of 
cash  sales  of  products  or  merchandise  for  immediate  or  prompt 
delivery  which  in  good  faith  are  actually  intended  to  be  delivered 
shall  be  subject  to  this  tax. 

Drafts  or  Checks 

6.  Drafts  or  checks  payable  otherwise  than  at  sight  or  on 
demand,  promissory  notes,  except  bank  notes  issued  for  circula- 
tion, and  for  each  renewal  of  the  same,  for  a  sum  not  exceeding 
$100,  2  cents ;  and  for  each  additional  $100  or  fractional  part 
thereof,  2  cents. 


50  THE  FEDERAL  WAR  TAX  LAW,   1917 

Conveyance 

7.  Conveyance:    Deed,  instrument,  or  writing,  whereby  any 
lands,  tenements,  or  other  realty  sold  shall  be  granted,  assigned, 
transferred,  or  otherwise  conveyed  to,  or  vested  in,  the  purchaser 
or  purchasers,  or  any  other  person  or  persons,  by  his,  her,  or 
their  direction,  when  the.  consideration  or  value  of  the  interest 
or  property  conveyed,  exclusive  of  the  value  of  any  lien  or  en- 
cumbrance remaining  thereon  at  the  time  of  sale,  exceeds  $100 
and  does  not  exceed  $500,  50  cents ;  and  for  each  additional  $500 
or  fractional  part  thereof  50  cents :    Provided,  That  nothing  con- 
tained in  this  paragraph  shall  be  so  construed  as  to  impose  a 
tax  upon  any  instrument  or  writing  given  to  secure  a  debt. 

Custom  House  Entries 

8.  Entry  of  any  goods,  wares,  or  merchandise  at  any  custom- 
house, either  for  consumption  or  warehousing,  not  exceeding  $100 
in  value,  25  cents;  exceeding  $100  and  not  exceeding  $500  in 
value,  50  cents;  exceeding  $500  in  value,  $1. 

Custom  Bonded  Warehouse 

9.  Entry  for  the  withdrawal  of  any  goods  or  merchandise 
from  customs  bonded  warehouse,  50  cents. 

10.  Passage  ticket,  one  way  or  round  trip,  for  each  pas- 
senger, sold  or  issued  in  the  United  States  for  passage  by  any 
vessel  to  a  port  or  place  not  in  the  United  States,  Canada,  or 
Mexico,  if  costing  not  exceeding  $30,  $1 ;  costing  more  than  $30 
and  not  exceeding  $60,  $3  ;  costing  more  than  $60,  $5 :    Provided. 
That  such  passage  tickets,  costing  $10  or  less,  shall  be  exempt 
from  taxation. 

Proxies 

11.  Proxy  for  voting  at  any  election  for  officers,  or  meeting 
for  the  transaction  of  business,  of  any  incorporated  company 
or  association,  except  religious,  educational,  charitable,  fraternal, 
or  literary  societies,  or  public  cemeteries,  10  cents. 

Power  of  Attorney 

12.  Power  of  attorney  granting  authority  to  do  or  perform 
some  act  for  or  in  behalf  of  the  grantor,  which  authority  is  not 
otherwise  vested  in  the  grantee,  25  cents :     Provided,  That  no 
stamps  shall  be  required  upon  any  papers  necessary  to  be  used 
for  the  collection  of  claims  from  the  United  States  or  from  any 
State  for  pensions,  back  pay,  bounty,  or  for  property  lost  in  the 
military  or  naval  service  or  upon  powers  of  attorney  required  in 
bankruptcy  cases. 

Playing  Cards 

13.  Playing  Cards:    Upon  every  pack  of  playing  cards  con- 
taining not  more  than  fifty-four  cards,  manufactured  or  imported, 
and  sold,  or  removed  for  consumption  or  sale,  after  the  passage 


THE  FEDERAL  WAR  TAX  LAW,   1917  51 

of  this  Act,  a  tax  of  5  cents  per  pack  in  addition  to  the  tax 
imposed  under  existing  law. 

Parcel  Post 

14.  Parcel  post  packages:  Upon  every  parcel  or  package 
transported  from  one  point  in  the  United  States  to  another  by 
parcel  post  on  which  the  postage  amounts  to  25  cents  or  more,  a 
tax  of  1  cent  for  each  25  cents  or  fractional  part  thereof  charged 
for  such  transportation  to  be  paid  by  the  consignor. 

No  such  parcel  or  package  shall  be  transported  until  a  stamp 
or  stamps  representing  the  tax  due  shall  have  been  affixed 
thereto. 

TITLE  IX.    WAR  ESTATE  TAX 

Section  900.  That  in  addition  to  the  tax  imposed  by  section 
two  hundred  and  one  of  the  Act  entitled,  "An  Act  to  increase 
the  revenue,  and  for  other  purposes,"  approved  September  eighth, 
nineteen  hundred  and  sixteen  r1  As  amended 

(a)  A  tax  equal  to  the  following  percentages  of  its  value  is 
hereby  imposed  upon  the  transfer  of  each  net  estate  of  every 
decedent  dying  after  the  passage  of  this  Act,  the  transfer  of 
which  is  taxable  under  such  section  (the  value  of  such  net  estate 
to  be  determined  as  provided  in  Title  II  of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen): 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  201.  That  a  tax  (here- 
inafter in  this  title  referred  to  as  the  tax),  equal  to  the  following 
percentges  of  the  value  of  the  net  estate,  to  be  determined  as  provided 
in  section  two  hundred  and  three,  is  hereby  imposed  upon  the  transfer 
of  the  net  estate  of  every  decedent  dying  after  the  passage  of  this  Act, 
whether  a  resident  or  nonresident  of  the  United  States: 

One  per  centum  of  the  amount  of  such  net  estate  not  in  excess  of 
$50,000; 

Two  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$50,000  and  does  not  exceed  $150,000; 

Three  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$150,000  and  does  not  exceed  $250,000; 

Four  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$250,000  and  does  not  exceed  $450,000; 

Five  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$450,000  and  does  not  exceed  $1,000,000; 

Six  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$1,000,000  and  does  not  exceed  $2,000,000; 

Seven  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$2,000,000  and  does  not  exceed  $3,000,000; 

Eight  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$3,000,000  and  does  not  exceed  $4,000,000; 

Nine  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$4,000,000  and  does  not  exceed  $5,000,000;  and 

Ten  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$5,000,000. 

Section  203.  That  for  the  purpose  of  the  tax  the  value  of  the  net 
estate  shall  be  determined — 

(a)  In  the  case  of  a  resident,  by  deducting  from  the  value  of  the 
gross  estate — 


52  THE  FEDERAL  WAR  TAX  LAW,   1917 

Estate  Tax  Rates 

One-half  of  one  per  centum  of  the  amount  of  such  net  estate 
not  in  excess  of  $50,000 ; 

One  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $50,000  and  does  not  exceed  $150,000; 

One  and  one-half  per  centum  of  the  amount  by  which  such 
net  estate  exceeds  $150,000  and  does  not  exceed  $250,000; 

Two  per  centum  of  the  amount  by  which  such  net  estate  ex- 
ceeds $250,000  and  does  not  exceed  $450,000 ; 

Two  and  one-half  per  centum  of  the  amount  by  which  such 
net  estate  exceeds  $450,000  and  does  not  exceed  $1,000,000; 

Three  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $1,000,000  and  does  not  exceed  $2,000,000 ; 

Three  and  one-half  per  centum  of  the  amount  by  which  such 
net  estate  exceeds  $2,000,000  and  does  not  exceed  $3,000,000; 

Four  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $3,000,000  and  does  not  exceed  $4,000,000 ; 

Four  and  one-half  per  centum  of  the  amount  by  which  such 
net  estate  exceeds  $4,000,000  and  does  not  exceed  $5,000,000 ; 

Five  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $5,000,000  and  does  not  exceed  $8,000,000 ; 

Seven  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $8,000,000  and  does  not  exceed  $10,000,000;  and 

Ten  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $10,000,000. 

(1)  Such  amounts   for  funeral   expenses,   administration   expenses, 
claims  against  the  estate,  unpaid  mortgages,  losses  incurred  during  the 
settlement  of  the  estate  arising  from  fires,  storms,  shipwreck,  or  other 
casualty,  and  from  theft,  when  such  losses  are  not  compensated  for  by 
insurance  or  otherwise,  support  during  the  settlement  of  the  estate  of 
those   dependent   upon   the   decedent,    and    such    other   charges   against 
the  estate,  as  are  allowed  by  the  laws  of  the  jurisdiction,  whether  within 
or  without  the  United  States,  under  which  the  estate  is  being  adminis- 
tered; and 

(2)  An  exemption  of  $50,000; 

(b)  In  the  case  of  a  non-resident,  by  deducting  from  the  value  of 
that  part  of  his  gross  estate  which  at  the  time  of  his  death  is  situated 
in  the  United  States  that  proportion  of  the  deductions  specified  in  para- 
graph (1)  of  subdivision  (a)  of  this  section  which  the  value  of  such 
part  bears  to  the  value  of  his  entire  gross  estate,  wherever  situated. 
But  no  deductions  shall  be  allowed  in  the  case  of  a  non-resident  unless 
the  executor  includes  in  the  return  required  to  be  filed  under  section 
two  hundred  and  five  the  value  at  the  time  of  his  death  of  that  part 
of  the  gross  estate  of  the  non-resident  not  situated  in  the  United  States. 


THE  FEDERAL  WAR  TAX   LAW,   1917  53 

Exemptions 

Section  901.  That  the  tax  imposed  by  this  title  shall  not 
apply  to  the  transfer  of  the  net  estate  of  any  decedent  dying  while 
serving  in  the  military  or  naval  forces  of  the  United  States, 
during  the  continuance  of  the  war  in  which  the  United  States 
is  now  engaged,  or  if  death  results  from  injuries  received  or 
disease  contracted  in  such  service,  within  one  year  after  the 
termination  of  such  war.  For  the  purposes  of  this  section  the 
termination  of  the  war  shall  be  evidenced  by  the  proclamation  of 
the  President. 

TITLE  X.    ADMINISTRATIVE  PROVISIONS 
Tax  on  Imports  and  Exports — West  Indian  Islands 

Section  1000.  That  there  shall  be  levied,  collected,  and  paid 
in  the  United  States,  upon  articles  coming  into  the  United  States 
from  the  West  Indian  Islands  acquired  from  Denmark,  a  tax 
equal  to  the  internal-revenue  tax  imposed  in  the  United  States 
upon  like  articles  of  domestic  manufacture ;  such  articles  shipped 
from  said  islands  to  the  United  States  shall  be  exempt  from  the 
payment  of  any  tax  imposed  by  the  internal-revenue  laws  of  said 
islands :  Provided,  That  there  shall  be  levied,  collected,  and  paid 
in  said  islands,  upon  articles  imported  from  the  United  States, 
a  tax  equal  to  the  internal-revenue  tax  imposed  in  said  islands 
upon  like  articles  there  manufactured;  and  such  articles  going 
into  said  islands  from  the  United  States  shall  be  exempt  from 
payment  of  any  tax  imposed  by  the  internal-revenue  laws  of  the 
United  States. 

Administrative  Provisions 

Section  1001.  That  all  administrative,  special,  or  stamp  pro- 
visions of  law,  including  the  law  relating  to  the  assessment  of 
taxes,  so  far  as  applicable,  are  hereby  extended  to  and  made  a 
part  of  this  Act,  and  every  person,  corporation,  partnership,  or 
association  liable  to  any  tax  imposed  by  this  Act,  or  for  the 
collection  thereof,  shall  keep  such  records  and  render,  under 
oath,  such  statements  and  returns,  and  shall  comply  with  such 
regulations  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  from  time  to  time 
prescribe. 

Returns  on  Tax  Paid  Articles 

Section  1002.  That  where  additional  taxes  are  imposed  by 
th,is  Act  upon  articles  or  commodities,  upon  which  the  tax  im- 
posed by  existing  law  has  been  paid,  the  person,  corporation, 
partnership,  or  association  required  by  this  Act  to  pay  the  tax 
shall,  within  thirty  days  after  its  passage,  make  return  under 
oath  in  such  form  and  under  such  regulations  as  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary 
of  the  Treasury,  shall  prescribe.  Payment  of  the  tax  shown  to 
be  due  may  be  extended  to  a  date  not  exceeding  seven  months 


54  THE  FEDERAL  WAR  TAX  LAW,   1917 

from  the  passage  of  this  Act,  upon  the  filing  of  a  bond  for  pay- 
ment in  such  form  and  amount  and  with  such  sureties  as  the 
Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  may  prescribe. 

Collection  of  Taxes  and  Penalties 

Section  1003.  That  in  all  cases  where  the  method  of  col- 
lecting the  tax  imposed  by  this  Act  is  not  specifically  provided, 
the  tax  shall  be  collected  in  such  manner  as  the  Commissioner 
of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  may  prescribe.  All  administrative  and  penalty  provi- 
sions of  Title  VIII  of  this  Act,  in  so  far  as  applicable,  shall  apply 
to  the  collection  of  any  tax  which  the  Commissioner  of  Internal 
Revenue  determines  or  prescribes  shall  be  paid  by  stamp. 

Penalty  for  Failure  to  Make  or  Making  a  Fraudulent  Return 

Section  1004.  That  whoever  fails  to  make  any  return  re- 
quired by  this  Act  or  the  regulations  made  under  authority 
thereof  within  the  time  prescribed  or  who  makes  any  false  or 
fraudulent  return,  and  whoever  evades  or  attempts  to  evade  any 
tax  imposed  by  this  Act  or  fails  to  collect  or  truly  to  account  for 
and  pay  over  any  such  tax,  shall  be  subject  to  a  penalty  of  not 
more  than  $1,000,  or  to  imprisonment  for  not  more  than  one  year, 
or  both,  at  the  discretion  of  the  court,  and  in  addition  thereto  a 
penalty  of  double  the  tax  evaded,  or  not  collected,  or  accounted 
for  and  paid  over,  to  be  assessed  and  collected  in  the  same  manner 
as  taxes  are  assessed  and  collected,  in  any  case  in  which  the 
punishment  is  not  otherwise  specifically  provided. 

Section  1005.  That  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  is  hereby 
authorized  to  make  all  needful  rules  and  regulations  for  the 
enforcement  of  the  provisions  of  this  Act. 

Tax  Stamps  on  Hand 

Section  1006.  That  where  the  rate  of  tax  imposed  by  this 
Act,  payable  by  stamps,  is  an  increase  over  previously  existing 
rates,  stamps  on  hand  in  the  collectors'  offices  and  in  the  Bureau 
of  Internal  Revenue  may  continue  to  be  used  until  the  supply  on 
hand  is  exhausted,  but  shall  be  sold  and  accounted  for  at  the 
rates  provided  by  this  Act,  and  assessment  shall  be  made  against 
manufacturers  and  other  taxpayers  having  such  stamps  on  hand 
on  the  day  this  Act  takes  effect  for  the  difference  between  the 
amount  paid  for  such  stamps  and  the  tax  due  at  the  rates  pro- 
vided by  this  Act. 
Contract  of  Sale  Made  Prior  to  May  9,  1917,  to  be  Executed 

After  Oct.  3,  1917 

Section  1007.  That  (a)  if  any  person,  corporation,  partner- 
ship, or  association  has  prior  to  May  ninth,  nineteen  hundred 


THE  FEDERAL  WAR  TAX   LAW,   1917  55 

and  seventeen,  made  a  bona  fide  contract  with  a  dealer  for  the 
sale,  after  the  tax  takes  effect,  of  any  article  (or,  in  the  case  of 
moving  picture  films,  such  a  contract  with  a  dealer,  exchange,  or 
exhibitor,  for  the  sale  or  lease  thereof)  upon  which  a  tax  is  im- 
posed under  Title  III,  IV,  or  VI,  or  under  subdivision  thirteen 
of  Schedule  A  of  Title  VIII,  or  under  this  section,  and  (b)  if 
such  contract  does  not  permit  the  adding  of  the  whole  of  such 
tax  to  the  amount  to  be  paid  under  such  contract,  then  the  vendee 
or  lessee  shall,  in  lieu  of  the  vendor  or  lessor,  pay  so  much  of 
such  tax  as  is  not  so  permitted  to  be  added  to  the  contract 
price. 

The  taxes  payable  by  the  vendee  or  lessee  under  this  section 
shall  be  paid  to  the  vendor  or  lessor  at  the  time  the  sale  or  lease 
is  consummated,  and  collected,  returned,  and  paid  to  the  United 
States  by  such  vendor  or  lessor  in  the  same  manner  as  provided 
in  section  five  hundred  and  three. 

The  term  "dealer"  as  used  in  this  section  includes  a  vendee 
who  purchases  any  article  with  intent  to  use  it  in  the  manufacture 
or  production  of  another  article  intended  for  sale. 

Disregard  Fraction  of  Less  Than  One-Half  Cent 

Section  1008.  That  in  the  payment  of  any  tax  under  this 
Act  not  payable  by  stamp  a  fractional  part  of  a  cent  shall  be 
disregarded  unless  it  amounts  to  one-half  cent  or  more,  in  which 
case  it  shall  be  increased  to  one  cent. 

Advance  Payment  of  Income  and  Excess  Profit  Taxes 

Section  1009.  That  the  Secretary  of  the  Treasury,  under 
rules  and  regulations  prescribed  by  him,  shall  permit  taxpayers 
liable  to  income  and  excess  profits  taxes  to  make  payments  in 
advance  in  installments  or  in  whole  of  an  amount  not  in  excess 
of  the  estimated  taxes  which  will  be  due  from  them,  and  upon 
determination  of  the  taxes  actually  due  any  amount  paid  in  excess 
shall  be  refunded  as  taxes  erroneously  collected :  Provided,  That 
when  payment  is  made  in  installments  at  least  one-fourth  of  such 
estimated  tax  shall  be  paid  before  the  expiration  of  thirty  days 
after  the  close  of  the  taxable  year,  at  least  an  additional  one- 
fourth  within  two  months  after  the  close  of  the  taxable  year,  at 
least  an  additional  one-fourth  within  four  months  after  the  close 
of  the  taxable  year,  and  the  remainder  of  the  tax  due  on  or 
before  the  time  now  fixed  by  law  for  such  payment:  Provided 
further,  That  the  Secretary  of  the  Treasury,  under  rules  and 
regulations  prescribed  by  him,  may  allow  credit  against  such 
taxes  so  paid  in  advance  of  an  amount  not  exceeding  three  per 
centum  per  annum  calculated  upon  the  amount  so  paid  from  the 
date  of  such  payment  to  the  date  now  fixed  by  law  for  such 
payment ;  but  no  such  credit  shall  be  allowed  on  payments 
in  excess  of  taxes  determined  to  be  due,  nor  on  payments 
made  after  the  expiration  of  four  and  one-half  months  after 
the  close  of  the  taxable  year.  All  penalties  provided  by  exist- 


56  THE  FEDERAL  WAR  TAX  LAW,   1917 

ing  law  for  failure  to  pay  tax  when  due  are  hereby  made 
applicable  to  any  failure  to  pay  the  tax  at  the  time  or  times 
required  in  this  section. 

Form  of  Payment  of  Income  and  Excess  Profit  Taxes 

Section  1010.  That  under  rules  and  regulations  prescribed 
by  the  Secretary  of  the  Treasury,  collectors  of  internal  revenue 
may  receive,  at  par  and  accrued  interest,  certificates  of  indebted- 
ness issued  under  section  six  of  the  Act  entitled  "An  Act  to 
authorize  an  issue  of  bonds  to  meet  expenditures  for  the  na- 
tional security  and  defense,  and,  for  the  purpose  of  assisting  in 
the  prosecution  of  the  war,  to  extend  credit  to  foreign  govern- 
ments, and  for  other  purposes,"  approved  April  twenty-fourth, 
nineteen  hundred  and  seventeen,  and  any  subsequent  Act  or 
Acts,  and  uncertified  checks  in  payment  of  income  and  excess- 
profits  taxes,  during  such  time  and  under  such  regulations  as 
the  Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  shall  prescribe;  but  if  a  check 
so  received  is  not  paid  by  the  bank  on  which  it  is  drawn  the 
person  by  whom  such  check  has  been  tendered  shall  remain 
liable  for  the  payment  of  the  tax  and  for  all  legal  penalties 
and  additions  the  same  as  if  such  check  had  not  been  tendered. 

TITLE  XL    POSTAL  RATES 

Effective  November  2,  1917 

First  Class  Mail  Increase 

Section  1100.  That  the  rate  of  postage  on  all  mail  matter  of 
the  first  class,  except  postal  cards,  shall  thirty  days  after  the 
passage  of  this  Act  be,  in  addition  to  the  existing  rate,  1  cent 
for  each  ounce  or  fraction  thereof:  Provided,  That  the  rate 
of  postage  on  drop  letters  of  the  first  class,  shall  be  2  cents  an 
ounce  or  fraction  thereof.  Postal  cards,  and  private  mailing  or 
post  cards  when  complying  with  the  requirements  of  existing 
!aw,  shall  be  transmitted  through  the  mails  at  1  cent  each  in 
addition  to  the  existing  rate. 

Free  Postage 

That  letters  written  and  mailed  by  soldiers,  sailors,  and 
marines  assigned  to  duty  in  a  foreign  country  engaged  in  the 
present  war  may  be  mailed  free  of  postage,  subject  to  such  rules 
and  regulations  as  may  be  prescribed  by  the  Postmaster  General. 

Publication  Provisions 

Section  1101.  That  on  and  after  July  first,  nineteen  hundred 
and  eighteen,  the  rates  of  postage  on  publications  entered  as 
second-class  matter  (including  sample  copies  to  the  extent  of 
ten  per  centum  of  the  weight  of  copies  mailed  to  subscribers 
during  the  calendar  year)  when  sent  by  the  publisher  thereof 


THE  FEDERAL  WAR  TAX   LAW,   1917  57 

from  the  post  office  of  publication  or  other  post  office,  or  when 
sent  by  a  news  agent  to  actual  subscribers  thereto,  or  to  other 
news  agents  for  the  purpose  of  sale ; 

(a)  In  the  case  of  the  portion  of  such  publication  devoted 
to  matter  other  than  advertisements,  shall  be  as  follows:    (1)  On 
and  after  July  first,  nineteen  hundred  and  eighteen,  and  until 
July  first,  nineteen  hundred  and  nineteen,  1*4  cents  per  pound 
or  fraction  thereof;  (2)  on  and  after  July  first,  nineteen  hundred 
and  nineteen,  \y2  cents  per  pound  or  fraction  thereof; 

(b)  In  the  case  of  the  portion  of  such  publication  devoted 
to  advertisements  the  rates  per  pound  or  fraction  thereof  for 
delivery  within  the  several  zones  applicable  to  fourth-class  mat- 
ter shall  be  as  follows  (but  where  the  space  devoted  to  adver- 
tisements does  not  exceed  five  per  centum  of  the  total  space,  the 
rate  of  postage  shall  be  the  same  as  if  the  whole  of  such  publica- 
tion was  devoted  to  matter  other  than  advertisements) :    (1)  On 
and  after  July  first,  nineteen  hundred  and  eighteen,  and  until 
July  first,  nineteen  hundred  and  nineteen,  for  the  first  and  sec- 
ond zones,  \l/4  cents;  for  the  third  zone,  \y2  cents;  for  the  fourth 
zone,  2  cents ;  for  the  fifth  zone,  2%  cents ;  for  the  sixth  zone, 
2l/2  cents;  for  the  seventh  zone,  3  cents;  for  the  eighth  zone, 
3^4   cents;   (2)   on  and  after  July  first,  nineteen  hundred  and 
nineteen,  and  until  July  first,  nineteen  hundred  and  twenty,  for 
the  first  and  second  zones,  \l/2  cents;  for  the  third  zone,  2  cents; 
for  the  fourth  zone,  3  cents ;  for  the  fifth  zone,  Zy2  cents ;  for  the 
sixth  zone,  4  cents ;  for  the  seventh  zone,  5  cents ;  for  the  eighth 
zone,  Sl/2  cents ;  (3)  on  and  after  July  first,  nineteen  hundred 
and  twenty,  and  until  July  first,  nineteen  hundred  and  twenty- 
one,  for  the  first  and  second  zones,  1^4  cents;  for  the  third  zone, 
2l/2  cents;  for  the  fourth  zone,  4  cents;  for  the  fifth  zone,  4^4 
cents;  for  the  sixth  zone,  5^  cents;  for  the  seventh  zone,  7 
cents ;  for  the  eighth  zone,  7^4  cents ;   (4)   on  and  after  July 
first,  nineteen  hundred  and  twenty-one,  for  the  first  and  sec- 
ond zones,  2  cents;  for  the  third  zone,  3  cents;  for  the  fourth 
zone,  5  cents;  for  the  fifth  zone,  6  cents;  for  the  sixth  zone,  7 
cents ;  for  the  seventh  zone,  9  cents ;  for  the  eighth  zone,  10  cents ; 

(c)  With  the  first  mailing  of  each  issue  of  each  such  pub- 
lication, the  publisher  shall  file  with  the  postmaster  a  copy  of 
such  issue,  together  with  a  statement  containing  such  informa- 
tion as  the  Postmaster  General  may  prescribe  for  determining 
the  postage  chargeable  thereon. 

Daily  Newspapers 

Section  1102.  That  the  rate  of  postage  on  daily  newspapers, 
when  the  same  are  deposited  in  a  letter-carrier  office  for  delivery 
by  its  carriers,  shall  be  the  same  as  now  provided  by  law ;  and 
nothing  in  this  title  shall  affect  existing  law  as  to  free  circula- 
tion and  existing  rates  on  second-class  mail  matter  within  the 
county  of  publication :  Provided,  That  the  Postmaster  General 
may  hereafter  require  publishers  to  separate  or  make  up  to 


58  THE  FEDERAL  WAR  TAX  LAW,   1917 

zones  in  such  a  manner  as  he  may  direct  all  mail  matter  of  the 
second  class  when  offered  for  mailing. 

Religious,  Educational  Periodicals,  Etc 

Section  1103.  That  in  the  case  of  newspapers  and  period- 
icals entitled  to  be  entered  as  second-class  matter  and  maintained 
by  and  in  the  interest  of  religious,  educational,  scientific,  philan- 
thropic, agricultural,  labor,  or  fraternal  organizations  or  asso- 
ciations, not  organized  for  profit  and  none  of  the  net  income 
of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual,  the  second-class  postage  rates  shall  be,  irrespective 
of  the  zone  in  which  delivered  (except  when  the  same  are  de- 
posited in  a  letter  carrier  office  for  delivery  by  its  carriers,  in 
which  case -the  rates  shall  be  the  same  as  now  provided  by 
law),  lj/s  cents  a  pound  or  fraction  thereof  on  and  after  July 
first,  nineteen  hundred  and  eighteen,  and  until  July  first,  nine- 
teen hundred  and  nineteen,  and  on  and  after  July  first,  nineteen 
hundred  and  nineteen,  \%  cents  a  pound  or  fraction  thereof.  The 
publishers  of  such  newspapers  or  periodicals  before  being  entitled 
to  the  foregoing  rates  shall  furnish  to  the  Postmaster  General, 
at  such  times  and  under  such  conditions  as  he  may  prescribe, 
satisfactory  evidence  that  none  of  the  net  income  of  such  organ- 
ization inures  to  the  benefit  of  any  private  stockholder  or  indi- 
vidual. 

Miscellaneous  Provisions 

Section  1104.  That  where  the  total  weight  of  any  one  edi- 
tion or  issue  of  any  publication  mailed  to  any  one  zone  does 
not  exceed  one  pound,  the  rate  of  postage  shall  be  1  cent. 

Section  1105.  The  zone  rates  provided  by  this  title  shall 
relate  to  the  entire  bulk  mailed  to  any  one  zone  and  not  to 
individually  addressed  packages. 

Section  1106.  That  where  a  newspaper  or  periodical  is 
mailed  by  other  than  the  publisher  or  his  agent  or  a  news  agent 
or  dealer,  the  rate  shall  be  the  same  as  now  provided  by  law. 

Section  1107.  That  the  Postmaster  General,  on  or  before 
the  tenth  day  of  each  month,  shall  pay  into  the  general  fund  of 
the  Treasury  an  amount  equal  to  the  difference  between  the 
estimated  amount  received  during  the  preceding  month  for  the 
transportation  of  first  class  matter  through  the  mails  and  the  esti- 
mated amount  which  would  have  been  received  under  the 
provisions  of  the  law  in  force  at  the  time  of  the  passage  of 
this  Act. 

Postmasters'   Salaries 

Section  1108.  That  the  salaries  of  postmasters  at  offices 
of  the  first,  second,  and  third  classes  shall  not  be  increased  after 
July  first,  nineteen  hundred  and  seventeen,  during  the  existence 
of  the  present  war.  The  compensation  of  postmasters  at  offices 
of  the  fourth  class  shall  continue  to  be  computed  on  the  basis  of 
the  present  rates  of  postage. 


THE  FEDERAL  WAR  TAX   LAW,   1917  59 

Clerk  Hire  Allowance 

Section  1109.  That  where  postmasters  at  offices  of  the 
third  class  have  been  since  May  first,  nineteen  hundred  and 
seventeen,  or  hereafter  are  granted  leave  without  pay  for  mili- 
tary purposes,  the  Postmaster  General  may  allow,  in  addition 
to  the  maximum  amounts  which  may  now  be  allowed  such  offices 
for  clerk  hire,  in  accordance  with  law,  an  amount  not  to  exceed 
fifty  per  centum  of  the  salary  of  the  postmaster. 

Mailing  Alcohol  and  Wines 

Section  1110.  That  section  five  of  the  Act  approved  March 
third,  nineteen  hundred  and  seventeen,  entitled  "An  Act  mak- 
ing appropriations  for  the  Post  Office  Department  for  the  year 
ending  June  thirtieth,  nineteen  hundred  and  eighteen,"  shall  not 
be  construed  to  apply  to  ethyl  alcohol  for  governmental,  scien- 
tific, medicinal,  mechanical,  manufacturing,  and  industrial  pur- 
poses, and  the  Postmaster  General  shall  prescribe  suitable  rules 
and  regulations  to  carry  into  effect  this  section  in  connection 
with  the  Act  of  which  it  is  amendatory,  nor  shall  said  section  be 
held  to  prohibit  the  use  of  the  mails  by  regularly  ordained  min- 
isters of  religion,  or  by  officers  of  regularly  established  churches, 
for  ordering  wines  for  sacramental  uses,  or  by  manufacturers 
and  dealers  for  quoting  and  billing  such  wines  for  such  purposes 
only. 

TITLE  XII.    INCOME  TAX  AMENDMENTS 

Section  1200.     That  subdivision  (a)  of  section  two  of  such 
Act  of  September  eighth,  nineteen  hundred  and  sixteen  :* 
is  hereby  amended  to  read  as  follows : 

"(a)  That,  subject  only  to  such  exemptions  and  deductions 
as  are  hereinafter  allowed,  the  net  income  of  a  taxable  person 
shall  include  gains,  profits,  and  income,  derived  from  salaries, 

Income  Defined. 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  2  (a)  That,  subject 
only  to  such  exemptions  and  deductions  as  are  herinafter  allowed,  the 
net  income  of  a  taxable  person  shall  include  gains,  profits,  and  income 
derived  from  salaries,  wages,  or  compensation  for  personal  service  of 
whatever  kind  and  in  whatever  form  paid,  or  from  professions,  vocations, 
businesses,  trade,  commerce,  or  sales,  or  dealings  in  property,  whether 
real  or  personal,  growing  out  of  the  ownership  or  use  of  or  interest  in 
real  or  personal  property,  also  from  interest,  rent,  dividends,  securities, 
or  the  transaction  of  any  business  carried  on  for  gain  or  profit,  or  gains 
or  profits  and  income  derived  from  any  source  whatever:  Provided, 
That  the  term  "dividends"  as  used  in  this  title  shall  be  held  to  mean 
any  distribution  made  or  ordered  to  be  made  by  a  corporation,  joint- 
stock  company,  association,  or  insurance  company,  out  of  its  earnings 
or  profits  accrued  since  March  first,  nineteen  hundred  and  thirteen,  and 
payable  to  its  shareholders,  whether  in  cash  or  in  stock  of  the  corpora- 
tion, joint-stock  company,  association,  or  insurance  company,  which 
stock  dividend  shall  be  considered  income,  to  the  amount  of  its  cash 
value. 


60  THE  FEDERAL  WAR  TAX  LAW,   1917 

wages,  or  compensation  for  personal  service  of  whatever  kind 
and  in  whatever  form  paid,  or  from  professions,  vocations,  busi- 
nesses, trade,  commerce,  or  sales,  or  dealings  in  property,  whether 
real  or  personal,  growing  out  of  the  ownership  or  use  of  or 
interest  in  real  or  personal  property,  also  from  interest,  rent, 
dividends,  securities,  or  the  transaction  of  any  business  carried 
on  for  gain  or  profit,  or  gains  or  profits  and  income  derived 
from  any  source  whatever." 

Exemptions 

Section   four  of   such   Act  of   September  eighth,   nineteen 
hundred  and  sixteen : 
is  hereby  amended  to  read  as  follows : 

"Section  4.  The  following  income  shall  be  exempt  from  the 
provisions  of  this  title: 

"The  proceeds  of  life  insurance  policies  paid  to  individual 
beneficiaries  upon  the  death  of  the  insured;  the  amount 
paid  by  him  under  life  insurance,  endowment,  or  annuity  con- 
tracts, either  during  the  term  or  at  the  maturity  of  the  term 
mentioned  in  the  contract  or  upon  surrender  of  the  contract; 
the  value  of  property  acquired  by  gift,  bequest,  devise,  or  descent 
(but  the  income  from  such  property  shall  be  included  as  in- 
come); interest  upon  the  obligations  of  a  State  or  any  political 
subdivision  thereof  or  upon  the  obligations  of  the  United  States 
(but  in  the  case  of  obligations  of  the  United  States  issued  after 
September  first,  nineteen  hundred  and  seventeen,  only  if  and 
to  the  extent  provided  in  the  Act  authorizing  the  issue  thereof) 
or  its  possessions  or  securities  issued  under  the  provisions  of 
the  Federal  Farm  Loan  Act  of  July  seventeenth,  nineteen  hun- 
dred and  sixteen ;  the  compensation  of  the  present  President  of 
the  United  States  during  the  term  for  which  he  has  been  elected 
and  the  judges  of  the  Supreme  and  inferior  courts  of  the  United 
States  now  in  office  and  the  compensation  of  all  officers  and 
employees  of  a  State,  or  any  political  subdivision  thereof,  except 
when  such  compensation  is  paid  by  the  United  States  Govern- 
ment." 

Section  1201  (1).    That  paragraphs  second  and  third  of  sub- 
division  (a)  of  section  five  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen:1 
are  hereby  amended  to  read  as  follows: 

"Second.  All  interest  paid  within  the  year  on  his  indebted- 
ness except  on  indebtedness  incurred  for  the  purchase  of  obliga- 
tions or  securities  the  interest  upon  which  is  exempt  from  taxa- 
tion as  income  under  this  title; 

"(ACT  OF  SEPTEMBER  8th,  1916)  Section  5.  Second.  All  in- 
terest paid  within  the  year  on  his  indebtedness; 

Third.  Taxes  paid  within  the  year  imposed  by  the  authority  of 
the  United  States,  or  its  Territories,  or  possessions,  or  any  foreign 
country  or  under  the  authority  of  any  State,  county,  school  district,  or 
municipality,  or  other  taxing  subdivision  of  any  State,  not  including 
those  assessed  against  local  benefits; 


THE  FEDERAL  WAR  TAX   LAW,   1917  61 

"Third.  Taxes  paid  within  the  year  imposed  by  the  author- 
ity of  the  United  States  (except  income  and  excess  profits  taxes) 
or  of  its  Territories,  or  possessions,  or  any  foreign  country,  or 
by  the  authority  of  any  State,  county,  school  district,  or  munic- 
ipality, or  other  taxing  subdivision  of  any  State,  not  including 
those  assessed  against  local  benefit;" 

Deductions  Allowed 

(2)  That  section  five  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteeji,  is  hereby  amended  by  adding  at 
the  end  of  subdivision  (a)  a  further  paragraph,  numbered  nine, 
to  read  as  follows: 

"Ninth,  Contributions  or  gifts  actually  made  within  the  year 
to  corporations  or  associations  organized  and  operated  exclu- 
sively for  religious,  charitable,  scientific,  or  educational  pur- 
poses, or  to  societies  for  the  prevention  of  cruelty  to  children  or 
animals,  no  part  of  the  net  income  of  which  inures  to  the  benefit 
of  any  private  stockholder  or  individual,  to  an  amount  not  in 
excess  of  fifteen  per  centum  of  the  taxpayer's  taxable  net  income 
as  computed  without  the  benefit  of  this  paragraph.  Such  con- 
tributions or  gifts  shall  be  allowable  as  deduction's  only  if  verified 
under  rules  and  regulations  prescribed  by  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury." 

Section   1202.     That    (1)   paragraphs   second   and   third   of 
subdivision  (a)  of  section  six  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen : 
are  hereby  amended  to  read  as  follows: 

"Second.  The  proportion  of  all  interest  paid  within  the 
year  by  such  person  on  his  indebtedness  (except  on  indebtedness 
incurred  for  the  purchase  of  obligations  or  securities  the  interest 
upon  which  is  exempt  from  taxation  as  income  under  this  title) 
which  the  gross  amount  of  his  income  for  the  year  derived 
from  sources  within  the  United  States  bears  to  the  gross  amount 
of  his  income  for  the  year  derived  from  all  sources  within  and 
without  the  United  States,  but  this  deduction  shall  be  allowed 
only  if  such  person  includes  in  the  return  required  by  section 
eight  all  the  information  necessary  for  its  calculation ; 

"Third.  Taxes  paid  within  the  year  imposed  by  the  author- 
ity of  the  United  States  (except  income  and  excess  profits 
taxes);  or  of  its  Territories,  or  possessions,  or  by  the  authority 
of  any  State,  county,  school  district,  or  municipality,  or  other 
taxing  subdivision  of  any  State,  paid  within  the  United  States, 
not  including  those  assessed  against  local  benefits ;" 

Deductions  Allowed  Non-Resident  Aliens 

(2)  Section  six  of  such  Act  of  September  eighth,  nineteen 
hundred  and  sixteen : 

is  also  further  amended  by  adding  a  new  subdivision  to  read  as 
follows. 


62  THE  FEDERAL  WAR  TAX  LAW,   1917 

"(c)  A  non-resident  alien  individual  shall  receive  the  benefit 
of  the  deductions  and  credits  provided  for  in  this  section  only 
by  filing  or  causing  to  be  filed  with  the  collector  of  Internal 
Revenue  a  true  and  accurate  return  of  his  total  income,  received 
from  all  sources,  corporate  or  otherwise,  in  the  United  States, 
in  the  manner  prescribed  by  this  title;  and  in  case  of  his  failure 
to  file  such  return  the  collector  shall  collect  the  tax  on  such 
income,  and  all  property  belonging  to  such  non-resident  alien 
individual  shall  be  liable  to  distraint  for  the  tax." 

Personal  Deductions 

Section  1203  (1)     That  section  seven  of  such  Act  of  Sep- 
tember eighth,  nineteen  hundred  and  sixteen  i1 
is  hereby  amended  to  read  as  follows : 

"Section  7.  That  for  the  purpose  of  the  normal  tax  only, 
there  shall  be  allowed  as  an  exemption  in  the  nature  of  a  deduc- 
tion from  the  amount  of  the  net  income  of  each  citizen  or  resi- 
dent of  the  United  States,  ascertained  as  provided  herein,  the 
sum  of  $3,000,  plus  $1,000  additional  if  the  person  making  the 
return  be  a  head  of  a  family  or  a  married  man  with  a  wife 
living  with  him,  or  plus  the  sum  of  $1,000  additional  if  the 
person  making  the  return  be  a  married  woman  with  a  husband 
living  with  her ;  but  in  no  event  shall  this  additional  exemption 
of  $1,000  be  deducted  by  both  a  husband  and  a  wife:  Provided, 
That  only  one  deduction  of  $4,000  shall  be  made  from  the  aggre- 
gate income  of  both  husband  and  wife  when  living  together; 
Provided  further,  That  if  the  person  making  the  return  is  the 
head  of  a  family  there  shall  be  an  additional  exemption  of  $200 
for  each  child  dependent  upon  such  person,  if  under  eighteen 
years  of  age,  or  if  incapable  of  self-support  because  mentally  or 
physically  defective,  but  this  provision  shall  operate  only  in  the 
case  of  one  parent  in  the  same  family:  Provided  further,  That 
guardians  or  trustees  shall  be  allowed  to  make  this  personal 
exemption  as  to  income  derived  from  the  property  of  which  such 
guardian  or  trustee  has  charge  in  favor  of  each  ward  or  cestue 
que  trust:  Provided  further,  That  in  no  event  shall  a  ward  or 
cestue  que  trust  be  allowed  a  greater  personal  exemption  than 
as  provided  in  this  section,  from  the  amount  of  net  income 

REPEALED 

'(ACT  OF  SEPTEMBER  8,  1916.) 

Section  7  (b)  A  nonresident  alien  individual  may  receive  the 
benefit  of  the  exemption  provided  for  in  this  section  only  by  filing  or 
causing  to  be  filed  with  the  collector  of  internal  revenue  a  true  and 
accurate  return  of  his  total  income,  received  from  all  sources,  corporate 
or  otherwise,  in  the  United  States,  in  the  manner  prescribed  by  this 
title;  and  in  case  of  his  failure  to  file  such  return  the  collector  shall 
collect  the  tax  on  such  income,  and  all  property  belonging  to  such 
nonresident  alien  individual  shall  be  liable  to  distraint  for  the  tax. 


THE  FEDERAL  WAR  TAX   LAW,   1917  63 

received  from  all  sources.  There  shall  also  be  allowed  an  ex- 
emption from  the  amount  of  the  net  income  of  estates  of  deceased 
citizens  or  residents  of  the  United  States  during  the  period  of 
administration  or  settlement,  and  of  trust  or  other  estates  of 
citizens  or  residents  of  the  United  States  the  income  of  which 
is  not  distributed  annually  or  regularly  under  the  provisions  of 
subdivision  (b)  of  section  two,  the  sum  of  $3,000,  including 
such  deductions  as  are  allowed  under  section  five." 

(2)  Subdivision  (b)  of  section  seven  of  such  Act  of  Sep- 
tember eighth,  nineteen  hundred  and  sixteen  is  hereby  repealed1 

Section  1204  (1)  That  subdivisions  (c)  and  (e)  of  section 
eight  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen2,  are  hereby  amended  to  read  as  follows : 

"(c)  Guardians,  trustees,  executors,  administrators,  re- 
ceivers, conservators,  and  all  persons,  corporations,  or  associa- 
tions, acting  in  any  fiduciary  capacity,  shall  make  and  render  a 
return  of  the  income  of  the  person,  trust,  or  estate  for  whom 
or  which  they  act,  and  be  subject  to  all  the  provisions  of  this 
title  which  apply  to  individuals.  Such  fiduciary  shall  make  oath 
that  he  has  sufficient  knowledge  of  the  affairs  of  such  persons, 
trust,  or  estate  to  enable  him  to  make  such  return  and  that  the 
same  is,  to  the  best  of  his  knowledge  and  belief,  true  and  cor- 
rect, and  be  subject  to  all  the  provisions  of  this  title  which  apply 
to  individuals :  Provided,  That  a  return  made  by  one  or  two 
or  more  joint  fiduciaries  filed  in  the  district  where  such  fiduciary 
resides,  under  such  regulations  as  the  Secretary  of  the  Treas- 
ury may  prescribe,  shall  be  a  sufficient  compliance  with  the 
requirements  of  this  paragraph :  Provided  further,  That  no  re- 
turn of  income  not  exceeding  $3,000  shall  be  required  except 
as  in  this  title  otherwise  provided. 

"(e)  Persons  carrying  on  business  in  partnership  shall  be 
liable  for  income  tax  only  in  their  individual  capacity,  and  the 
share  of  the  profits  of  the  partnership  to  which  any  taxable 
partner  would  be  entitled  if  the  same  were  divided,  whether 
divided  or  otherwise,  shall  be  returned  for  taxation  and  the  tax 
paid  under  the  provisions  of  this  title :  Provided,  That  from  the 
net  distributive  interests  on  which  the  individual  members  shall 
be  liable  for  tax,  normal  and  additional,  there  shall  be  excluded 
their  proportionate  shares  received  from  interests  on  the  obliga- 

*(ACT  OF  SEPTEMBER  8th,  1916)  Section  8  (e)  Persons  carry- 
ing on  business  in  partnership  shall  be  liable  for  income  tax  only  in 
their  individual  capacity,  and  the  share  of  the  profits  of  the  partnership 
to  which  any  taxable  partner  would  be  entitled  if  the  same  were  divided, 
whether  divided  or  otherwise,  shall  be  returned  for  taxation  and  the 
tax  paid  under  the  provisions  of  this  title:  Provided,  That  from  the 
net  distributive  interests  on  which  the  individual  members  shall  be 
liable  for  tax,  normal  and  additional,  there  shall  be  excluded  their 
proportionate  shares  received  from  interest  on  the  obligations  of  a 
State  or  any  political  or  taxing  subdivision  thereof,  and  upon  the  ob- 
ligations of  the  United  States  and  its  possessions,  and  all  taxes  paid 
to  the  United  States  or  to  any  possession  thereof,  or  to  any  State, 


64  THE  FEDERAL  WAR  TAX  LAW,   1917 

tions  of  a  State  or  any  political  or  taxing  subdivision  thereof, 
and  upon  the  obligations  of  the  United  States  (if  and  to  the 
extent  that  it  is  provided  in  the  Act  authorizing  the  issue  of 
such  obligations  of  the  United  States  that  they  are  exempt  from 
taxation),  and  its  possessions,  and  that  for  the  purpose  of  com- 
puting the  normal  tax  there  shall  be  allowed  a  credit,  as  provided 
by  section  five,  subdivision  (b),  for  their  proportionate  share 
of  the  profits  derived  from  dividends.  Such  partnership,  when 
requested  by  the  Commissioner  of  Internal  Revenue  or  any  dis- 
trict collector,  shall  render  a  correct  return  of  the  earnings, 
profits,  and  income  of  the  partnership,  except  income  exempt 
under  section  four  of  this  Act,  setting  forth  the  item  of  the 
gross  income  and  the  deductions  and  credits  allowed  by  this 
title,  and  the  names  and  addresses  of  the  individuals  who  would 
be  entitled  to  the  net  earnings,  profits,  and  income,  if  distributed. 
A  partnership  shall  have  the  same  privilege  of  fixing  and  mak- 
ing returns  upon  the  basis  of  its  own  fiscal  year  as  is  accorded 
to  corporations  under  this  title.  If  a  fiscal  year  ends  during 
nineteen  hundred  and  sixteen  or  a  subsequent  calendar  year 
for  which  there  is  a  rate  of  tax  different  from  the  rate  for  the 
preceding  calendar  year,  then  (1)  the  rate  for  such  preceding 
calendar  year  shall  apply  to  an  amount  of  each  partner's  share 
of  such  partnership  profits  equal  to  the  proportion  which  the  part 
of  such  fiscal  year  falling  within  such  calendar  year  bears  to 
the  full  fiscal  year,  and  (2)  the  rate  for  the  calendar  year  during 
which  such  fiscal  year  ends  shall  apply  to  the  remainder. 

(2)     Subdivision  (d)  of  section  eight  of  such  Act  of  Sep- 
tember eighth,  nineteen  hundred  and  sixteen1 
is  hereby  repealed: 

county,  or  taxing  subdivision  of  a  State,  and  that  for  the  purpose  of 
computing  the  normal  tax  there  shall  be  allowed  a  credit,  as  provided 
by  section  five,  subdivision  (b),  for  their  proportionate  share  of  the 
profits  derived  from  dividends.  And  such  partnership,  when  requested 
by  the  Commissioner  of  Internal  Revenue,  or  any  district  collector, 
shall  render  a  correct  return  of  the  earnings,  profits,  and  income  of 
the  partnership,  except  income  exempt  under  section  four  of  this  Act, 
setting  forth  the  item  of  the  gross  income  and  the  deductions  and 
credits  allowed  by  this  title,  and  the  names  and  addresses  of  the  in- 
dividuals who  would  be  entitled  to  the  net  earnings,  profits,  and  income, 
if  distributed. 

(REPEALED)  '(ACT  OF  SEPTEMBER  8th,  1916)  Section  8 
(d)  All  persons,  firms,  companies,  copartnerships,  corporations,  joint- 
stock  companies,  or  associations,  and  insurance  companies,  except  as 
hereinafter  provided,  in  whatever  capacity  acting,  having  the  control, 
receipt,  disposal,  or  payment  of  fixed  or  determinable  annual  or  period- 
ical gains,  profits,  and  income  of  another  individual  subject  to  tax,  shall 
in  behalf  of  such  person  deduct  and  withhold  from  the  payment  an 
amount  equivalent  to  the  normal  tax  upon  the  same  and  make  and 
render  a  return,  as  aforesaid,  but  separate  and  distinct,  of  the  portion 
of  the  income  of  each  person  from  which  the  normal  tax  has  been  thus 
withheld,  and  containing  also  the  name  and  address  of  such  person 
or  stating  that  the  name  and  address  or  the  address,  as  the  case  may 
be,  are  unknown:  Provided,  That  the  provision  requiring  the  normal 
tax  of  individuals  to  be  deducted  and  withheld  at  the  source  of  the 


THE  FEDERAL  WAR  TAX  LAW,   1917  65 

Section  1205  (1)     That  subdivisions  (b),  (c),  (f),  and  (g), 

of  sections  nine  of  such  Act  of  September  eighth,  nineteen  hun- 
dred and  sixteen,1  is  hereby  amended  to  read  as  follows : 

income  shall  not  be  construed  to  require  the  withholding  of  such  tax 
according  to  the  two  per  centum  normal  tax  rate  herein  prescribed  until 
on  and  after  January  first,  nineteen  hundred  and  seventeen,  and  the 
law  existing  at  the  time  of  the  passage  of  this  Act  shall  govern  the 
amount  withheld  or  to  be  withheld  at  the  source  until  January  first, 
nineteen  hundred  and  seventeen. 

That  in  either  case  mentioned  in  subdivisions  (c)  and  (d)  of  this 
section  no  return  of  income  not  exceeding  $3,000  shall  be  required, 
except  as  in  this  title  provided. 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  9  (b)  All  persons, 
firms,  copartnerships,  companies,  corporations,  joint-stock  companies,  or 
associations,  and  insurance  companies,  in  whatever  capacity  acting,  in- 
cluding lessees  or  mortgagors  of  real  or  personal  property,  trustees 
acting  in  any  trust  capacity,  executors,  administrators,  receivers,  con- 
servators, employers,  and  all  officers  and  employees  of  the  United  States 
having  the  control,  receipt,  custody,  disposal,  or  payment  of  interest, 
rent,  salaries,  wages,  premiums,  annuities,  compensation,  remuneration, 
emoluments,  or  other  fixed  or  determinable  annual  or  periodical  gains, 
profits,  and  income  of  another  person,  exceeding  $3,000  for  any  taxable 
year,  other  than  income  derived  from  dividends  on  capital  stock,  or 
from  the  net  earnings  of  corporations  and  joint-stock  companies  or 
associations,  or  insurance  companies,  the  income  of  which  is  taxable 
under  this  title,  who  are  required  to  make  and  render  a  return  in  behalf 
of  another,  as  provided  herein,  to  the  collector  of  his,  her,  or  its  district, 
are  hereby  authorized  and  required  to  deduct  and  withhold  from  such 
annual  or  periodical  gains,  profits,  and  income  such  sum  as  will  be 
sufficient  to  pay  the  normal  tax  imposed  thereon  by  this  title,  and  shall 
pay  the  amount  withheld  to  the  officer  of  the  United  States  Government 
authorized  to  receive  the  same;  and  they  are  each  hereby  made  per- 
sonally liable  for  such  tax,  and  they  are  each  hereby  indemnified  against 
every  person,  corporation,  association,  or  demand  whatsover  for  all 
payments  which  they  shall  make  in  pursuance  and  by  virtue  of  this 
title. 

In  all  cases  where  the  income  tax  of  a  person  is  withheld  and  de- 
ducted and  paid  or  to  be  paid  at  the  source,  such  person  shall  not 
receive  the  benefit  of  the  personal  exemption  allowed  in  section  seven 
of  this  title  except  by  an  application  for  refund  of  the  tax  unless  he 
shall,  not  less  than  thirty  days  prior  to  the  day  on  which  the  return  of 
his  income  is  due,  file  with  the  person  who  is  required  to  withhold  and 
pay  tax  for  him  a  signed  notice  in  writing  claiming  the  benefit  of  such 
exemption,  and  thereupon  no  tax  shall  be  withheld  upon  the  amount 
of  such  exemption;  Provided,  That  if  any  person  for  the  purpose  of 
obtaining  any  allowance  or  reduction  by  virtue  of  a  claim  for  such 
exemption,  either  for  himself  or  for  any  other  person,  knowingly  makes 
any  false  statement  or  false  or  fraudulent  representation,  he  shall  be 
liable  to  a  penalty  of  not  exceeding  $300. 

And  where  the  income  tax  is  paid  or  to  be  paid  at  the  source,  no 
person  shall  be  allowed  the  benefit  of  any  deduction  provided  for  in 
sections  five  or  six  of  this  title  unless  he  shall,  not  less  than  thirty 
days  prior  to  the  day  on  which  the  return  of  his  income  is  due,  either 
(l)  file  with  the  person  who  is  required  to  withhold  and  pay  tax  for 
him  a  true  and  correct  return  of  his  gains,  profits,  and  income  from  all 
other  sources,  and  also  the  deductions  asked  for,  and  the  showing  thus 
made  shall  then  become  a  part  of  the  return  to  be  made  in  his  behalf 
by  the  person  required  to  withold  and  pay  the  tax,  or  (2)  likewise  make 
application  for  deductions  to  the  collector  of  the  district  in  which  return 


66  THE  FEDERAL  WAR  TAX   LAW,    1917 

"(b)  All  persons,  corporations,  partnerships,  associations, 
and  insurance  companies,  in  whatever  capacity  acting,  includ- 
ing lessees  or  mortgagors  of  real  or  personal  property,  trustees 
acting  in  any  trust  capacity,  executors,  administrators,  receivers, 
conservators,  employers,  and  all  officers  and  employees  of  the 
United  States,  having  the  control,  receipt,  custody,  disposal, 
or  payment  of  interest,  rent,  salaries,  wages,  premiums,  annuities, 
compensation,  remuneration,  emoluments,  or  other  fixed  or  de- 
terminable  annual  or  periodical  gains,  profits,  and  income  of 
any  nonresident  alien  individual,  other  than  income  derived  from 
dividends  on  capital  stock,  or  from  the  net  earnings  of  a  corpora- 
tion, joint-stock  company  or  association,  or  insurance  company, 
which  is  taxable  upon  its  net  income  as  provided  in  this  title, 
are  hereby  authorized  and  required  to  deduct  and  withhold 
from  such  annual  or  periodical  gains,  profits,  and  income  such 

is  made  or  to  be  made  for  him:  Provided,  That  when  any  amount 
allowable  as  a  deduction  is  known  at  the  time  of  receipt  of  fixed  annual 
or  periodical  income  by  an  individual  subject  to  tax,  he  may  file  with 
the  person,  firm,  or  corporation  making  the  payment  a  certificate,  under 
penalty  for  false  claim,  and  in  such  form  as  shall  be  prescribed  by  the 
Commissioner  of  Internal  Revenue,  stating  the  amount  of  such  deduc- 
tion and  making  a  claim  for  an  allowance  of  the  same  against  the 
amount  of  tax  otherwise  required  to  be  deducted  and  withheld  at  the 
source  of  the  income,  and  such  certificate  shall  likewise  become  a  part 
of  the  return  to  be  made  in  his  behalf. 

If  such  person  is  absent  from  the  United  States  or  is  unable,  owing 
to  serious  illness,  to  make  the  return,  and  application  above  provided 
for,  the  return  and  application  may  be  made  by  an  agent,  he  making 
oath  that  he  has  sufficient  knowledge  of  the  affairs  and  property  of  his 
principal  to  enable  him  to  make  a  full  and  complete  return,  and  that 
the  return  and  application  made  by  him  are  full  and  complete. 

Section  9  (c)  The  amount  of  the  normal  tax  hereinbefore  imposed 
shall  be  deducted  and  withheld  from  fixed  or  determinable  annual  or 
periodical  gains,  profits,  and  income  derived  from  interest  upon  bonds 
and  mortgages,  or  deeds  of  trust  or  other  similar  obligations  of  cor- 
porations, joint-stock  companies,  associations,  and  insurance  companies, 
whether  payable  annually  or  at  shorter  or  longer  periods,  although  such 
interest  does  not  amount  to  three  thousand  ($3,000.00)  dollars,  subject 
to  the  provisions  of  this  title  requiring  the  tax  to  be  withheld  at  the 
source,  and  deducted  from  annual  income  and  returned  and  paid  to 
the  government. 

Section  9  (f)  All  persons,  firms,  or  corporations  undertaking  as  a 
matter  of  business  or  for  profit  the  collection  of  foreign  payments  of 
such  interest  or  dividends  by  means  of  coupons,  checks,  or  bills  of  ex- 
change shall  obtain  a  license  from  the  Commissioner  of  Internal 
Revenue,  and  shall  be  subject  to  such  regulations  enabling  the  Govern- 
ment to  ascertain  and  verify  the  due  withholding  and  payment  of  the 
income  tax  required  to  be  withheld  and  paid  as  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
shall  prescribe:  and  any  person  who  shall  knowingly  undertake  to 
collect  such  payments  as  aforesaid  without  having  obtained  a  license 
therefor,  or  without  complying  with  such  regulations,  shall  be  deemed 
guilty  of  a  misdemeanor  and  for  each  offense  be  fined  in  a  sum  not 
exceeding  $5.000,  or  imprisoned  for  a  term  not  exceeding  one  year,  or 
both,  in  the  discretion  of  the  court. 


THE  FEDERAL  WAR  TAX   LAW,   1917  67 

sum  as  will  be  sufficient  to  pay  the  normal  tax  imposed  thereon 
by  this  title,  and  shall  make  return  thereof  on  or  before  March 
first  of  each  year,  and,  on  or  before  the  time  fixed  by  law  for 
the  payment  of  the  tax,  shall  pay  the  amount  withheld  to  the 
officer  of  the  United  States  Government  authorized  to  receive 
the  same;  and  they  are  each  hereby  made  personally  liable  for 
such  tax,  and  they  are  each  hereby  indemnified  against  every 
person,  corporation,  partnership,*  association,  or  insurance  com- 
pany, or  demand  whatsoever  for  all  payments  which  they  shall 
make  in  pursuance  and  by  virtue  of  this-  title. 

"(c)  The  amount  of  the  normal  tax  hereinbefore  imposed 
shall  also  be  deducted  and  withheld  from  fixed  or  determinable 
annual  or  periodical  gains,  profits  and  income  derived  from 
interest  upon  bonds  and  mortgages,  or  deeds  of  trust  or  other 
similar  obligations  of  corporations,  joint-stock  companies,  asso- 
ciations, and  insurance  companies  (if  such  bonds,  mortgages, 
or  other  obligations  contain  a  contract  or  provision  by  which 
the  obligor  agrees  to  pay  any  portion  of  the  tax  imposed  by 
this  title  upon  the  obligee  or  to  reimburse  the  obligee  for  any 
portion  of  the  tax  or  to  pay  the  interest  without  deduction  for 
any  tax  which  the  obligor  may  be  required  or  permitted  to  pay 
thereon  or  to  retain  therefrom  under  any  law  of  the  United 
States),  whether  payable  annually  or  at  shorter  or  longer  periods 
and  whether  such  interest  is  payable  to  a  non-resident  alien 
individual  or  to  an  individual  citizen  or  resident  of  the  United 
States,  subject  to  the  provisions  of  the  foregoing  subdivisions  (b) 
of  this  section  requiring  the  tax  to  be  withheld  at  the  source 
and  deducted  from  annual  income  and  returned  and  paid  to 
the  Government,  unless  the  person  entitled  to  receive  such  in- 
terest shall  file  with  the  withholding  agent,  on  or  before  Febru- 
ary first,  a  signed  notice  in  writing  claiming  the  benefit  of  an 
exemption  under  section  seven  of  this  title. 

Section  9  (g)  The  tax  herein  imposed  upon  gains,  profits,  and 
income  not  falling  under  the  foregoing  and  not  returned  and  paid  by 
virtue  of  the  foregoing  shall  be  assessed  by  personal  return  under  rules 
and  regulations  to  be  prescribed  by  the  Commissioner  of  Internal  Reve- 
nue and  approved  by  the  Secretary  of  the  Treasury.  The  intent  and 
purpose  of  this  title  is  that  all  gains,  profits,  and  income  of  a  taxable 
class,  as  defined  by  this  title,  shall  be  charged  and  assessed  with  the 
corresponding  tax,  normal  and  additional,  prescribed  by  this  title,  and 
said  tax  shall  be  paid  by  the  owner  of  such  income,  or  the  proper 
representative  having  the  receipt,  custody,  control,  or  disposal  of  the 
same.  For  the  purpose  of  this  title  ownership  or  liability  shall  be 
determined  as  of  the  year  for  which  a  return  is  required  to  be  rendered. 

The  provisions  of  this  title  relating  to  the  deduction  and  payment 
of  the  tax  at  the  source  of  income  shall  only  apply  to  the  normal  tax 
hereinbefore  imposed  upon  individuals. 


68  THE  FEDERAL  WAR  TAX  LAW,   1917 

License  Required  for  Foreign  Collections 

"(f)  All  persons,  corporations,  partnerships,  or  associations, 
undertaking  as  a  matter  of  business  or  for  profit  the  collection 
of  foreign  payments  of  interest  or  dividends  by  means  of  cou- 
pons, checks,  or  bills  of  exchange  shall  obtain  a  license  from 
the  Commissioner  of  Internal  Revenue,  and  shall  be  subject  to 
such  regulations  enabling  the  Government  to  obtain  the  informa- 
tion required  under  this  title,  as  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury 
shall  prescribe ;  and  whoever  knowingly  undertakes  to  collect 
such  payments  as  aforesaid  without  having  obtained  a  license 
therefor  or  without  complying  with  such  regulations,  shall  be 
deemed  guilty  of  a  misdemeanor  and  for  each  offense  be  fined 
in  a  sum  not  exceeding  $5,000,  or  imprisoned  for  a  term  not 
exceeding  one  year,  or  both,  in  the  discretion  of  the  court. 

General  Provisions 

"(g)  The  tax  herein  imposed  upon  gains,  profits,  and  in- 
comes not  falling  under  the  foregoing  and  not  returned  and  paid 
by  virtue  of  the  foregoing  or  as  otherwise  provided  by  law  shall 
be  assessed  by  personal  return  under  rules  and  regulations  to 
be  prescribed  by  the  Commissioner  of  Internal  Revenue  and 
approved  by  the  Secretary  of  the  Treasury.  The  intent  and 
purpose  of  this  title  is  that  all  gains,  profits,  and  income  of  a 
taxable  class,  as  defined  by  this  title,  shall  be  charged  and 
assessed  with  the  corresponding  tax,  normal  and  additional, 
prescribed  by  this  title,  and  said  tax  shall  be  paid  by  the  owner 
of  such  income,  or  the  proper  representative  having  the  receipt, 
custody,  control,  or  disposal  of  the  same.  For  the  purpose  of 
this  title  ownership  or  liability  shall  be  determined  as  of  the 
year  for  which  a  return  is  required  to  be  rendered. 

"The  provisions  of  this  section,  except  subdivision  (c)  relat- 
ing to  the  deduction  and  payment  of  the  tax  at  the  source  of 
income  shall  only  apply  to  the  normal  tax  hereinbefore  imposed 
upon  non-resident  alien  individuals." 

(2)  Subdivisions  (d)  and  (e)  of  section  nine  of  such  Act 
of  September  eighth,  nineteen  hundred  and  sixteen,  are  hereby 
repealed  r1 

'(REPEALED)  Section  9  (d)  And  likewise  the  amount  of  such 
tax  shall  be  deducted  and  withheld  from  coupons,  checks,  or  bills  of 
exchange  for  or  in  payment  of  interest  upon  bonds  of  foreign  countries 
and  upon  foreign  mortgages  or  like  obligations  (not  payable  in  the 
United  States),  and  also  from  coupons,  checks,  or  bills  of  exchange 
for  or  in  payment  of  any  dividends  upon  the  stock  or  interest  upon 
the  obligations  of  foreign  corporations,  associations,  and  insurance 
companies  engaged  in  business  in  foreign  countries. 

And  the  tax  in  such  cases  shall  be  withheld,  deducted,  and  returned 
for  and  in  behalf  of  any  person  subject  to  the  tax  hereinbefore  imposed, 
although  such  interest  or  dividends  do  not  exceed  $3,000,  by  (1)  any 
banker  or  person  who  shall  sell  or  otherwise  realize  coupons,  checks,  or 
bills  of  exchange  drawn  or  made  in  payment  of  any  such  interest  or 


THE  FEDERAL  WAR  TAX  LAW,   1917  69 

Section  1206  (1)  That  the  first  paragraph  of  section  ten 
of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen  i1 
is  hereby  amended  to  read  as  follows : 

"Section  10  (a)  That  there  shall  be  levied,  assessed,  col- 
lected, and  paid  annually  upon  the  total  net  income  received 
in  the  preceding  calendar  year  from  all  sources  by  every  cor- 
poration, joint-stock  company  or  association,  or  insurance  com- 
pany, organized  in  the  United  States,  no  matter  how  created  or 
organized,  but  not  including  partnerships,  a  tax  of  two  per 
centum  upon  such  income ;  and  a  like  tax  shall  be  levied,  assessed, 
collected,  and  paid  annually  upon  the  total  net  income  received 
in  the  preceding  calendar  year  from  all  sources  within  the  United 
States  by  every  corporation,  joint-stock  company  or  association, 
or  insurance  company,  organized,  authorized,  or  existing  under 
the  laws  of  any  foreign  country,  including  interest  on  bonds, 
notes,  or  other  interest-bearing  obligations  of  residents,  corporate 
or  otherwise,  and  including  the  income  derived  from  dividends 
on  capital  stock  or  from  net  earnings  of  resident  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies, 
whose  net  income  is  taxable  under  this  title." 

Undistributed  Profits 

(2)  Section  ten  of  such  Act  of  September  eighth,  nineteen 
hundred  and  sixteen: 

is  hereby  further  amended  by  adding  a  new  subdivision  as 
follows : 

"(b)  In  addition  to  the  income  tax  imposed  by  subdi- 
vision (a)  of  this  section  there  shall  be  levied,  assessed,  collected, 
and  paid  annually  an  additional  tax  of  ten  per  centum  upon  the 
amount  remaining  undistributed  six  months  after  the  end  of 
each  calendar  or  fiscal  year,  of  the  total  net  income  of  every 

dividends  (not  payable  in  the  United  States),  and  (2)  any  person  who 
shall  obtain  payment  (not  in  the  United  States),  in  behalf  of  another 
of  such  dividends  and  interest  by  means  of  coupons,  checks,  or  bills 
of  exchange,  and  also  (3)  any  dealer  in  such  coupons  who  shall  purchase 
the  same  for  any  such  dividends  or  interest  (not  payable  in  the  United 
States),  otherwise  than  from  a  banker  or  another  dealer  in  such  coupons. 

(e)  Where  the  tax  is  witheld  at  the  source,  the  benefit  of  the  ex- 
emption and  the  deductions  allowable  under  this  title  may  be  had  by 
complying  with  the  foregoing  provisions  of  this  section. 

"(ACT  OF  SEPTEMBER  8th,  1916)  Section  10.  That  there  shall 
be  levied,  assessed,  collected,  and  paid  annually  upon  the  total  net  in- 
come received  in  the  preceding  calendar  year  from  all  sources  by  every 
corporation,  joint-stock  company  or  association,  or  insurance  company, 
organized  in  the  United  States,  no  matter  how  created  or  organized 
but  not  including  partnerships,  a  tax  of  two  per  centum  upon  such 
income;  and  a  like  tax  shall  be  levied,  assessed,  collected,  and  paid 
annually  upon  the  total  net  income  received  in  the  preceding  calendar 
year  from  all  sources  within  the  United  States  by  every  corporation, 
joint-stock  company  or  association,  or  insurance  company  organized, 
authorized,  or  existing  under  the  laws  of  any  foreign  country,  including 
interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of  resi- 
dents, corporate  or  otherwise,  and  including  the  income  derived  from 


70  THE   FEDERAL  WAR  TAX  LAW,    1917 

corporation,  joint-stock  company  or  association,  or  insurance 
company,  received  during  the  year,  as  determined  for  the  pur- 
poses of  the  tax  imposed  by  such  subdivision  (a),  but  not  in- 
cluding the  amount  of  any  income  taxes  paid  by  it  within  the 
year  imposed  by  the  authority  of  the  United  States. 

"The  tax  imposed  by  this  subdivision  shall  not  apply  to 
that  portion  of  such  undistributed  net  income  which  is  actually 
invested  and  employed  in  the  business  or  is  retained  for  em- 
ployment in  the  reasonable  requirements  of  the  business  or  is 
invested  in  obligations  of  the  United  States  issued  after  Sep- 
tember first,  nineteen  hundred  and  seventeen :  Provided,  That 
if  the  Secretary  of  the  Treasury  ascertains  and  finds  that  any 
portion  of  such  amount  so  retained  at  any  time  for  employment 
in  the  business  is  not  so  employed  or  is  not  reasonably  required 
in  the  business  a  tax  of  fifteen  per  centum  shall  be  levied,  as- 
sessed, collected,  and  paid  thereon. 

"The  foregoing  tax  rates  shall  apply  to  the  undistributed 
net  income  received  by  every  taxable  corporation,  joint-stock 
company  or  association,  or  insurance  company  in  the  calendar 
year  nineteen  hundred  and  seventeen,  and  in  each  year  there- 
after, except  that  if  it  has  fixed  its  own  fiscal  year  under  the  pro- 
visiqns  of  existing  law,  the  foregoing  rates  shall  apply  to  the 
proportion  of  the  taxable  undistributed  net  income  returned 
for  the  fiscal  year  ending  prior  to  December  thirty-first,  nineteen 
hundred  and  seventeen,  which  the  period  between  January  first, 
nineteen  hundred  and  seventeen,  and  the  end  of  such  fiscal  year 
bears  to  the  whole  of  such  fiscal  year." 

Corporate  Deductions 

Section  1207  (1)  That  paragraphs  third  and  fourth  of  sub- 
division (a)  of  section  twelve  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen1  are  hereby  amended  to  read  as 
follows : 

dividends  on  capital  stock  or  from  net  earnings  of  resident  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies  whose 
net  income  is  taxable  under  this  title:  Provided,  That  the  term  "divi- 
dends" as  used  in  this  title  shall  be  held  to  mean  any  distribution  made 
or  ordered  to  be  made  by  a  corporation,  joint-stock  company,  associa- 
tion, or  insurance  company,  out  of  its  earnings  or  profits  accrued  since 
March  first,  nineteen  hundred  and  thirteen,  and  payable  to  its  share- 
holders, whether  in  cash  or  in  stock  of  the  corporation,  joint-stock 
company,  association,  or  insurance  company,  which  stock  dividend  shall 
be  considered  income,  to  the  amount  of  its  cash  value. 

Section  12.  Third.  The  amount  of  interest  paid  within  the  year 
on  its  indebtedness  to  an  amount  of  such  indebtedness  not  in  excess 
of  the  sum  of  (a)  the  entire  amount  of  the  paid-up  stock  outstanding 
at  the  close  of  the  year,  or,  if  no  capital  stock,  the  entire  amount  of 
capital  employed  in  the  business  at  the  close  of  the  year,  and  (b)  one- 
half  of  its  interest-bearing  indebtedness  then  outstanding;  Provided, 
That  for  the  purpose  of  this  title  preferred  capital  stock  shall  not  be 
considered  interest-bearing  indebtedness,  and  interest  or  dividends  paid 
upon  this  stock  shall  not  be  deductible  from  gross  income;  Provided 


THE  FEDERAL  WAR  TAX   LAW,    1917  71 

"Third.  The  amount  of  interest  paid  within  the  year  on 
its  indebtedness  (except  on  indebtedness  incurred  for  the  pur- 
chase of  obligations  or  securities  the  interest  upon  which  is 
exempt  from  taxation  as  income  under  this  title)  to  an  amount 
of  such  indebtedness  not  in  excess  of  the  sum  of  (a)  the  entire 
amount  of  the  paid-up  capital  stock  outstanding  at  the  close 
of  the  year,  or,  if  no  capital  stock,  the  entire  amount  of  capital 
employed  in  the  business  at  the  close  of  the  year,  and  (b)  one- 
half  of  its  interest-bearing  indebtedness  then  outstanding:  Pro- 
vided, That  for  the  purpose  of  this  title  preferred  capital  stock 
shall  not  be  considered  interest-bearing  indebtedness,  and  interest 
or  dividends  paid  upon  this  stock  shall  not  be  deductible  from 
gross  income :  Provided  further,  That  in  cases  wherein  shares 
of  capital  stock  are  issued  without  par  or  nominal  value,  the 
amount  of  paid-up  capital  stock,  within  the  meaning  of  this 
section,  as  represented  by  such  shares,  will  be  the  amount  of 
cash,  or  its  equivalent,  paid  or  transferred  to  the  corporation 
as  a  consideration  for  such  shares :  Provided  further,  That  in 
the  case  of  indebtedness  wholly  secured  by  property  collateral, 
tangible  or  intangible,  the  subject  of  sale  or  hypothecation  in 
the  ordinary  business  of  such  corporation,  joint-stock  company 
or  association  as  a  dealer  only  in  the  property  constituting  such 
collateral,  or  in  loaning  the  funds  thereby  procured,  the  total 
interest  paid  by  such  corporation,  company,  or  association  within 
the  year  on  any  such  indebtedness  may  be  deducted  as  a  part 
of  its  expenses  of  doing  business,  but  interest  on  such  indebted- 
further,  That  in  cases  wherein  shares  of  capital  stock  are  issued  without 
par  or  nominal  value,  the  amount  of  paid-up  capital  stock,  within  the 
meaning  of  this  section,  as  represented  by  such  shares,  will  be  the 
amount  of  cash,  or  its  equivalent,  paid  or  transferred  to  the  corporation 
as  a  consideration  for  such  shares;  Provided  further,  That  in  the  case 
of  indebtedness  wholly  secured  by  property  collateral,  tangible  or 
intangible,  the  subject  of  sale  or  hypothecation  in  the  ordinary  business 
of  such  corporation,  joint-stock  company  or  association  as  a  dealer  only 
in  the  property,  constituting  such  collateral,  or  in  loaning  the  funds 
thereby  procured,  the  total  interest  paid  by  such  corporation,  company, 
or  association  within  the  year  on  any  such  indebtedness  may  be  deducted 
as  a  part  of  its  expenses  of  doing  business,  but  interest  on  such 
indebtedness  shall  only  be  deductible  on  an  amount  of  such  indebtedness 
not  in  excess  of  the  actual  value  of  such  property  collateral;  Provided 
further,  That  in  the  case  of  bonds  or  other  indebtedness,  which  have 
been  issued  with  a  guaranty  that  the  interest  payable  thereon  shall  be 
free  from  taxation,  no  deduction  for  the  payment  of  the  tax  herein 
imposed,  or  any  other  tax  paid  pursuant  to  such  guaranty,  shall  be 
allowed;  and  in  the  case  of  a  bank,  banking  association,  loan  or  trust 
company,  interest  paid  within  the  year  on  deposits  or  on  moneys  re- 
ceived for  investment  and  secured  by  interest-bearing  certificates  of 
indebtedness  issued  by  such  bank,  banking  association,  loan  or  trust 
company; 

Fourth.  Taxes  paid  within  the  year  imposed  by  the  authority  of 
the  United  States,  or  its  Territories,  or  possessions,  or  any  foreign 
country,  or  under  the  authority  of  any  State,  county,  school  district, 
or  municipality,  or  other  taxing  subdivision  of  any  State,  not  including 
those  assessed  against  local  benefits. 


72  THE  FEDERAL  WAR  TAX  LAW,   1917 

ness  shall  only  be  deductible  on  an  amount  of  such  indebted- 
ness not  in  excess  of  the  actual  value  of  such  property  collateral ; 
Provided  further,  That  in  the  case  of  bonds  or  other  indebtedness, 
which  have  been  issued  with  a  guaranty  that  the  interest  pay- 
able thereon  shall  be  free  from  taxation,  no  deduction  for  the 
payment  of  the  tax  herein  imposed,  or  any  other  tax  paid  pur- 
suant to  such  guaranty,  shall  be  allowed ;  and  in  the  case  of 
a  bank,  banking  association,  loan  or  trust  company,  interest 
paid  within  the  year  on  deposits  or  on  moneys  received  for 
investment  and  secured  by  interest-bearing  certificates  of  in- 
debtedness issued  by  such  bank,  banking  association,  loan  or 
trust  company  shall  be  deducted ; 

"Fourth.  Taxes  paid  within  the  year  imposed  by  the  au- 
thority of  the  United  States  (except  income  and  excess  profits 
taxes),  or  of  its  Territories,  or  possessions,  or  any  foreign  coun- 
try, or  by  the  authority  of  any  State,  county,  school  district,  or 
municipality,  or  other  taxing  subdivision  of  any  State,  not  in- 
cluding those  assessed  against  local  benefits." 

Deductions — Foreign  Corporations 

(2)     Paragraphs    third    and   fourth    of   subdivision    (b)    of 
section  twelve  of  such  Act  of  September  eighth,  nineteen  hundred 
and  sixteen  :* 
are  hereby  amended  to  read  as  follows: 

"Third.  The  amount  of  interest  paid  within  the  year  on 
its  indebtedness  (except  on  indebtedness  incurred  for  the  pur- 
chase of  obligations  or  securities  the  interest  upon  which  is 
exempt  from  taxation  as  income  under  this  title)  to  an  amount 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  12.  Third.  The 
amount  of  interest  paid  within  the  year  on  its  indebtedness  to  an  amount 
of  such  indebtedness  not  in  excess  of  the  proportion  of  the  sum  of 
(a)  the  entire  amount  of  the  paid-up  capital  stock  outstanding  at  the 
close  of  the  year,  or,  if  no  capital  stock,  the  entire  amount  of  the  capital 
employed  in  the  business  at  the  close  of  the  year,  and  (b)  one-half  of 
its  interest-bearing  indebtedness  then  outstanding,  which  the  gross 
amount  of  its  income  for  the  year  from  business  transacted  and  capital 
invested  within  the  United  States  bears  to  the  gross  amount  of  its  in- 
come derived  from  all  sources  within  and  without  the  United  States: 
Provided,  That  in  the  case  of  bonds  or  other  indebtedness  which  have 
been  issued  with  a  guaranty  that  the  interest  payable  thereon  shall  be 
free  from  taxation,  no  deduction  for  the  payment  of  the  tax  herein 
imposed  or  any  other  tax  paid  pursuant  to  such  guaranty  shall  be 
allowed;  and  in  case  of  a  bank,  banking  association,  loan  or  trust 
company,  or  branch  thereof,  interest  paid  within  the  year  on  deposits 
by  or  on  moneys  received  for  investment  from  either  citizens  or  residents 
of  the  United  States  and  secured  by  interest-bearing  certificates  of  in- 
debtdedness,  issued  by  such  bank,  banking  association,  loan  or  trust 
company,  or  branch  thereof; 

Fourth.  Taxes  paid  within  the  year  imposed  by  the  authority  of 
the  United  States,  or  its  Territories,  or  possessions,  or  under  the 
authority  of  any  State,  county,  school  district,  or  municipality,  or  other 
taxing  subdivision  of  any  State,  paid  within  the  United  States,  not 
including  those  assessed  against  local  benefits; 


THE  FEDERAL  WAR  TAX   LAW,   1917  73 

of  such  indebtedness  not  in  excess  of  the  proportion  of  the 
sum  of  (a)  the  entire  amount  of  th«  paid-up  capital  stock  out- 
standing at  the  close  of  the  year,  or,  if  no  capital  stock,  the 
entire  amount  of  the  capital  employed  in  the  business  at  the 
close  of  the  year,  and  (b)  one-half  of  its  interest-bearing  indebted- 
ness then  outstanding,  which  the  gross  amount  of  its  income 
for  the  year  from  business  transacted  and  capital  invested  within 
the  United  States  bears  to  the  gross  amount  of  its  income  derived 
from  all  sources  within  and  without  the  United  States :  Provided, 
That  in  the  case  of  bonds  or  other  indebtedness  which  have 
been  issued  with  a  guaranty  that  the  interest  payable  thereon 
shall  be  free  from  taxation,  no  deduction  for  the  payment  of 
the  tax  herein  imposed  or  any  other  tax  paid  pursuant  to  such 
guaranty  shall  be  allowed ;  and  in  case  of  a  bank,  banking  asso- 
ciation, loan  or  trust  company,  or  branch  thereof,  interest  paid 
within  the  year  on  deposits  by  or  on  moneys  received  for  invest- 
ment from  either  citizens  or  residents  of  the  United  States 
and  secured  by  interest-bearing  certificates  of  indebtedness  issued 
by  such  bank,  banking  association,  loan  or  trust  company,  or 
branch  thereof; 

"Fourth.  Taxes  paid  within  the  year  imposed  by  the  au- 
thority of  the  United  States  (except  income  and  excess  profits 
taxes),  or  of  its  Territories,  or  possessions,  or  by  the  authority 
of  any  State,  county,  school  district,  or  municipality,  or  other 
taxing  subdivision  of  any  State,  paid  within  the  United  States, 
not  including  those  assessed  against  local  benefits." 

Withholding  Income  of  Non-Resident  Aliens 

Section  1208.  That  subdivision  (e)  of  section  thirteen  of 
such  Act  of  September  eighth,  nineteen  hundred  and  sixteen  r1 
is  hereby  amended  to  read  as  follows : 

"(e)  All  the  provisions  of  this  title  relating  to  the  tax 
authorized  and  required  to  be  deducted  and  withheld  and  paid 
to  the  officer  of  the  United  States  Government  authorized  to 
receive  the  same  from  the  income  of  non-resident  alien  individ- 
uals from  sources  within  the  United  States  shall  be  made  ap- 
plicable to  the  tax  imposed  by  subdivision  (a)  of  section  ten 
upon  income  derived  from  interest  upon  bonds  and  mortgages 
or  deeds  of  trust  or  similar  obligations  of  domestic  or  other 

J(ACT  OF  SEPTEMBER  8th,  1916)  Section  13  (e)  All  the  pro- 
visions of  this  title  relating  to  the  tax  authorized  and  required  to  be 
deducted  and  withheld  and  paid  to  the  officer  of  the  United  States 
Government  authorized  to  receive  the  same  from  the  income  of  non- 
resident alien  individuals  from  sources  within  the  United  States  shall 
be  made  applicable  to  incomes  derived  from  interest  upon  bonds  and 
mortgages  or  deeds  of  trust  or  similar  obligations  of  domestic  or  other 
resident  corporations,  joint-stock  companies  or  associations,  and  in- 
surance companies  by  nonresident  alien  firms,  copartnerships,  companies, 
corporations,  joint-stock  companies  or  associations,  and  insurance  com- 
panies not  engaged  in  business  or  trade  within  the  United  States  and 
not  having  any  office  or  place  of  business  therein. 


74  THE   FEDERAL  WAR  TAX   LAW,    1917 

resident  corporations,  joint-stock  companies  or  associations,  and 
insurance  companies  by  non-resident  alien  firms,  co-partnerships, 
companies,  corporations,  joint-stock  companies  or  associations, 
and  insurance  companies,  not  engaged  in  business  or  trade  within 
the  United  States  and  not  having  any  office  or  place  of  business 
therein." 

Penalty  for  Failure  to  File  Return 

Section  1209.  That  section  eighteen  of  such  Act  of  Septem- 
ber eighth,  nineteen  hundred  and  sixteen1  is  hereby  amended  to 
read  as  follows: 

"Section  18.  That  any  person,  corporation,  partnership,  as- 
sociation, or  insurance  company,  liable  to  pay  the  tax,  to  make 
a  return  or  to  supply  information  required  under  this  Title,  who 
refuses  or  neglects  to  pay  such  tax,  to  make  such  return  or  to 
supply  such  information  at  the  time  or  times  herein  specified 
in  each  year,  shall  be  liable,  except  as  otherwise  specially  pro- 
vided in  this  title,  to  a  penalty  of  not  less  than  $20  nor  more 
than  $1,000.  Any  individual  or  any  officer  of  any  corporation, 
partnership,  association,  or  insurance  company,  required  by  law 
to  make,  render,  sign,  or  verify  any  return  or  to  supply  any 
information,  who  makes  any  false  or  fraudulent  return  or  state- 
ment with  intent  to  defeat  or  evade  the  assessment  required  by 
this  title  to  be  made,  shall  be  guilty  of  a  misdemeanor,  and  shall 
be  fined  not  exceeding  $2,000  or  be  imprisoned  not  exceeding 
one  year,  or  both,  in  the  discretion  of  the  court,  with  the  costs 
of  prosecution :  Provided,  That  where  any  tax  heretofore  due 
and  payable  has  been  duly  paid  by  the  taxpayer,  it  shall  not 
be  re-collected  from  any  withholding  agent  required  to  retain 
it  at  its  source,  nor  shall  any  penalty  be  imposed  or  collected 
in  such  cases  from  the  taxpayer,  or  such  withholding  agent 
whose  duty  it  was  to  retain  it,  for  failure  to  return  or  pay  the 
same,  unless  such  failure  was  fradulent  and  for  the  purpose  of 
evading  payment." 

Information  to  Commissioner  Compulsory 

Section  1210.  That  section  twenty-six  of  such  Act  of  Sep- 
tember eighth,  nineteen  hundred  and  sixteen,  as  amended  by 
the  Act  entitled  "An  Act  to  provide  increased  revenue  to  defray 
the  expenses  of  the  increased  appropriations  for  the  Army  and 
Navy  and  the  extensions  of  fortifications,  and  for  other  purposes." 

'(ACT  OF  SEPTEMBER  8th,  1916)  Section  18.  That  if  any  in- 
dividual liable  to  make  the  return  or  pay  the  tax  aforesaid  shall  refuse 
or  neglect  to  make  such  return  at  the  time  or  times  hereinbefore  speci- 
fied in  each  year,  he  shall  be  liable  to  a  penalty  of  not  less  than  $20 
nor  more  than  $1,000.  Any  individual  or  any  officer  of  any  corporation, 
joint-stock  company  or  association,  or  insurance  company  required  by 
law  to  make,  render,  sign,  or  verify  any  return  who  makes  any  false  or 
fraudulent  return  or  statement  with  intent  to  defeat  or  evade  the  assess- 
ment required  by  this  title  to  be  made  shall  be  guilty  of  a  misdemeanor, 
and  shall  be  fined  not  exceeding  $2,000  or  be  imprisoned  not  exceeding 


THE  FEDERAL  WAR  TAX   LAW,   1917  75 

approved  March  third,  nineteen  hundred  and  seventeen,  is  hereby 
amended  to  read  as  follows : 

"Section  26.  Every  corporation,  joint-stock  company  or  as- 
sociation, or  insurance  company  subject  to  the  tax  herein  imposed, 
when  required  by  the  Commissioner  of  Internal  Revenue,  shall 
render  a  correct  return,  duly  verified  under  oath,  of  its  payments 
of  dividends,  whether  made  in  cash  or  its  equivalent  or  in  stock, 
including  the  names  and  addresses  of  stockholders  and  the  num- 
ber of  shares  owned  by  each,  and  the  tax  years  and  the  applica- 
ble amounts  in  which  such  dividends  were  earned,  in  such  form 
and  manner  as  may  be  prescribed  by  the  Commissioner  of  In- 
ternal Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury." 

Brokers'  Returns  of  Customer  Names,  Etc. 

Section  1211.  That  Title  I  of  such  Act  of  September  eighth, 
nineteen  hundred  and  sixteen,  is  hereby  amended  by  adding  to 
Part  III  six  new  sections,  as  follows: 

"Section  27.  That  every  person,  corporation,  partnership, 
or  association,  doing  business  as  a  broker  on  any  exchange  or 
board  of  trade  or  other  similar  place  of  business  shall,  when 
required  by  the  Commissioner  of  Internal  Revenue,  render  a 
correct  return  duly  verified  under  oath,  under  such  rules  and 
regulations  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  prescribe,  show- 
ing the  names  of  customers  for  whom  such  person,  corporation, 
partnership,  or  association  has  transacted  any  business,  with  such 
details  as  to  the  profits,  losses,  or  other  information  which  the 
commisioner  may  require,  as  to  each  of  such  customers,  as  will 
enable  the  Commissioner  of  Internal  Revenue  to  determine 
whether  all  income  tax  due  on  profits  or  gains  of  such  customers 
has  been  paid. 

Returns  by  Party  Making  Payments  to  Others 

Section  28.  That  all  persons,  corporations,  partnerships,  as- 
sociations, and  insurance  companies,  in  whatever  capacity  acting, 
including  lessees  or  mortgagors  of  real  or  personal  property, 
trustees  acting  in  any  trust  capacity,  executors,  administrators, 
receivers,  conservators,  and  employers,  making  payment  to  an- 
other person,  corporation,  partnership,  association,  or  insurance 
company,  of  interest,  rent,  salaries,  wages,  premiums,  annuities, 
compensation,  remuneration,  emoluments,  or  other  fixed  or  deter- 

one  year,  or  both,  in  the  discretion  of  the  court,  with  the  costs  of 
prosecution:  Provided,  That  where  any  tax  heretofore  due  and  payable 
has  been  duly  paid  by  the  taxpayer,  it  shall  not  be  re-collected  from 
any  person  or  corporation  required  to  retain  it  at  its  source,  nor  shall 
any  penalty  be  imposed  or  collected  in  such  cases  from  the  taxpayer,  or 
such  person  or  corporation  whose  duty  it  was  to  retain  it,  for  failure  to 
return  or  pay  the  same,  unless  such  failure  was  fraudulent  and  for  the 
purpose  of  evading  payment. 


76  THE  FEDERAL  WAR  TAX  LAW,   1917 

minable  gains,  profits,  and  income  (other  than  payments  de- 
scribed in  sections  twenty-six  and  twenty-seven),  of  $800  or 
more  in  any  taxable  year,  or,  in  the  case  of  such  payments  made 
by  the  United  States,  the  officers  or  employees  of  the  United 
States  having  information  as  to  such  payments  and  required  to 
make  returns  in  regard  thereto  by  the  regulations  hereinafter 
provided  for,  are  hereby  authorized  and  required  to  render  a 
true  and  accurate  return  to  the  Commissioner  of  Internal  Rev- 
enue, under  such  rules  and  regulations  and  in  such  form  and 
manner  as  may  be  prescribed  by  him,  with  the  approval  of  the 
Secretary  of  the  Treasury,  setting  forth  the  amount  of  such 
gains,  profits,  and  income,  and  the  name  and  address  of  the 
recipient  of  such  payment:  Provided,  That  such  returns  shall 
be  required,  regardless  of  amounts,  in  the  case  of  payments  of 
interest  upon  bonds  and  mortgages  or  deeds  of  trust  or  other 
similar  obligations  of  corporations,  joint-stock  companies,  asso- 
ciations, and  insurance  companies,  and  in  the  case  of  collections 
of  items  (not  payable  in  the  United  States)  of  interest  upon  the 
bonds  of  foreign  countries  and  interest  from  the  bonds  and  divi- 
dends from  the  stock  of  foreign  corporations  by  persons,  cor- 
porations, partnerships,  or  associations,  undertaking  as  a  matter 
of  business  or  for  profit  the  collection  of  foreign  payments  of 
such  interest  or  dividends  by  means  of  coupons,  checks,  or 
bills  of  exchange. 

"When  necessary  to  make  effective  the  provisions  of  this 
section  the  name  and  address  of  the  recipient  of  income  shall, 
be  furnished  upon  demand  of  the  person,  corporation,  partner- 
ship, association,  or  insurance  company  paying  the  income. 

"The  provisions  of  this  section  shall  apply  to  the  calendar 
year  nineteen  hundred  and  seventeen  and  each  calendar  year 
thereafter,  but  shall  not  apply  to  the  payment  of  interest  on 
obligations  of  the  United  States. 

Excess  Profits  Tax  Credits 

"Section  29.  That  in  assessing  income  tax  the  net  income 
embraced  in  the  return  shall  also  be  credited  with  the  amount 
of  any  excess  profits  tax  imposed  by  Act  of  Congress  and  as- 
sessed for  the  same  calendar  or  fiscal  year  upon  the  taxpayer, 
and,  in  the  case  of  a  member  of  a  partnership,  with  his  propor- 
tionate share  of  such  excess  profits  tax  imposed  upon  the  part- 
nership. (Under  Act  of  March  third,  nineteen  hundred  and 
seventeen,  repealed.) 

"Section  30.  That  nothing  in  section  II  of  the  Act  approved 
October  third,  nineteen  hundred  and  thirteen,  entitled  "An  Act 
to  reduce  tariff  duties  and  to  provide  revenue  for  the  Govern- 
ment, and  for  other  purposes,"  or  in  this  title,  shall  be  construed 
as  taxing  the  income  of  foreign  governments  received  from 
investments  in  the  United  States  in  stocks,  bonds,  or  other 
domestic  securities,  owned  by  such  foreign  governments,  or 


THE  FEDERAL  WAR  TAX  LAW,   1917  77 

from  interest  on  deposits  in  banks  in  the  United  States  of  moneys 
belonging  to  foreign  governments. 

Dividends  Defined 

"Section  31  (a)  That  the  term  'dividends'  as  used  in  this 
title  shall  be  held  to  mean  any  distribution  made  or  ordered  to 
be  made  by  a  corporation,  joint-stock  company,  association,  or 
insurance  company,  out  of  its  earnings  or  profits  accrued  since 
March  first,  nineteen  hundred  and  thirteen,  and  payable  to  its 
shareholders,  whether  in  cash  or  in  stock  of  the  corporation, 
joint-stock  company,  association,  or  insurance  company,  which 
stock  dividend  shall  be  considered  income,  to  the  amount  of 
the  earnings  or  profits  so  distributed. 

Deferred  Dividends 

"(b)  Any  distribution  made  to  the  shareholders  or  mem- 
bers of  a  corporation,  joint-stock  company,  or  association,  or  in- 
surance company,  in  the  year  nineteen  hundred  and  seventeen, 
or  subsequent  tax  years,  shall  be  deemed  to  have  been  made 
from  the  most  recently  accumulated  undivided  profits  or  surplus, 
and  shall  constitute  a  part  of  the  annual  income  of  the  distributee 
for  the  year  in  which  received,  and  shall  be  taxed  to  the  dis- 
tributeee  at  the  rates  prescribed  by  law  for  the  years  in  which 
such  profits  or  surplus  were  accumulated  by  the  corporation, 
joint-stock  company,  association,  or  insurance  company,  but  noth- 
ing herein  shall  be  construed  as  taxing  any  earnings  or  profits 
accrued  prior  to  March  first,  nineteen  hundred  and  thirteen,  but 
such  earnings  or  profits  may  be  distributed  in  stock  dividends 
or  otherwise,  exempt  from  the  tax,  after  the  distribution  of 
earnings  and  profits  accrued  since  March  first,  nineteen  hun- 
dred and  thirteen,  has  been  made.  This  subdivision  shall  not 
apply  to  any  distribution  made  prior  to  August  sixth,  nineteen 
hundred  and  seventeen,  out  of  earnings  or  profits  accrued  prior 
to  March  first,  nineteen  hundred  and  thirteen. 

Insurance  Not  Deductible 

"Section  32.  That  premiums  paid  on  life  insurance  policies 
covering  the  lives  of  officers,  employees,  or  those  financially 
interested  in  any  trade  or  business  conducted  by  an  individual, 
partnership,  corporation,  joint-stock  company  or  association,  or 
insurance  company,  shall  not  be  deducted  in  computing  the 
net  income  of  such  individual,  corporation,  joint-stock  company 
or  association,  or  insurance  company,  or  in  computing  the  profits 
of  such  partnership  for  the  purposes  of  subdivision  (e)  of  sec- 
tion nine." 

Withheld  Taxes  Released 

Section  1212.  That  any  amount  heretofore  withheld  by  any 
withholding  agent  as  required  by  Title  I  of  such  Act  of  Sep- 
tember eighth,  nineteen  hundred  and  sixteen : 


78  THE   FEDERAL  WAR  TAX  LAW,   1917 

On  account  of  the  tax  imposed  upon  the  income  of  any 
individual,  a  citizen  or  resident  of  the  United  States,  for  the 
calendar  year  nineteen  hundred  and  seventeen,  except  in  the 
cases  covered  by  subdivision  (c)  of  section  nine  of  such  Act, 
as  amended  by  this  Act,  shall  be  released  and  paid  over  to 
such  individual,  and  the  entire  tax  upon  the  income  of  such 
individual  for  such  year  shall  be  assessed  and  collected  in  the 
manner  prescribed  by  such  Act  as  amended  by  this  Act. 

TITLE  XIII.     GENERAL  PROVISIONS 

Section  1300.  That  if  any  clause,  sentence,  paragraph,  or 
part  of  this  Act  shall  for  any  reason  be  adjudged  by  any  court 
of  competent  jurisdiction  to  be  invalid,  such  judgment  shall 
not  affect,  impair,  or  invalidate  the  remainder  of  said  Act,  but 
shall  be  confined  in  its  operation  to  the  clause,  sentence,  para- 
graph, or  part  thereof  directly  involved  in  the  controversy  in 
which  such  judgment  shall  have  been  rendered. 

Repeal 

Section  1301.  That  Title  I  of  the  Act  entitled  "An  Act  to 
provide  increased  revenue  to  defray  the  expenses  of  the  increased 
appropriations  for  the  Army  and  Navy  and  the  extension  of 
fortifications,  and  for  other  purposes,"  approved  March  third, 
nineteen  hundred  and  seventeen,  be,  and  the  same  is  hereby, 
repealed. 

Section  1302.  That  unless  otherwise  herein  specially  pro- 
vided, this  Act  shall  take  effect  on  the  day  following  its  passage. 

Approved,  October  third,  nineteen  hundred  and  seventeen. 


DIGEST 


OF 

COURT  AND  TREASURY  DECISIONS 

RULES,  REGULATIONS,  OPINIONS 

AND  COMMENTARIES 

GOVERNING 

THE  ADMINISTRATION  AND  OPERATION 
OF  THE 

ACT  OF  SEPTEMBER  8,   1916 
ACT   OF   OCTOBER   3,   1917 


TREASURY  DECISIONS 


Abatement  or  Refund  of  Taxes,  Form  To  Be  Used:  Claims  for  re- 
funding of  assessed  taxes  and  penalties  must  be  made  on  Form  46.  The 
burden  of  proof  rests  upon  the  claimant.  All  the  facts  relied  upon  in 
support  of  claim  should  be  clearly  set  forth  under  oath.  The  claim 
should  be  still  further  supported  by  an  affidavit  of  the  deputy  collector 
of  the  proper  division,  and  by  certificate  of  the  collector. 

Claims  for  abatement  of  taxes  and  penalties  erroneously  or  illegally 
assessed,  or  which  are  abatable  under  remedial  acts,  etc.,  must  be  made 
out  upon  Form  47.  (Reg.  14,  Revised.) 

Claims  for  Refund  of  Excess  Amount  Withheld  at  Source:  Claims 
for  abatement  of  taxes  erroneously  assessed,  or  which  are  excessive 
in  amount,  may,  prior  to  collection  thereof,  be  filed  under  the  provision 
of  said  Sec.  3320,  Rev.  St.,  either  by  withholding  agent  by  whom  assess- 
ment was  made,  or  by  the  person  on  account  of  whom  such  taxes  were 
withheld.  (Art.  33,  Reg.  33.) 

When  it  is  found  that  a  withholding  agent  has  failed  to  withhold 
tax  and  make  return,  field  officers  will  at  once  procure  the  return  re- 
quired by  law  and  regulations.  The  delinquent  return  should  be  ac- 
companied by  claim,  executed  on  Form  47,  for  the  abatement  of  such 
items  of  tax  as  can  be  shown  to  have  been  paid  by  the  individual  tax- 
payers. The  delinquent  withholding  return  will  then  receive  consid- 
eration in  connection  with  personal  returns  or  to  be  made  by  individuals 
concerned.  (Letter  1265.) 

Accounts  Kept  on  Basis  Other  Than  of  Actual  Receipts  and  Dis- 
bursements: As  this  office  requires  no  special  system  of  bookkeeping, 
neither  does  it  require  any  specific  method  by  which  net  income  shall 
be  returned  by  corporations.  (T.  D.  2161.) 

It  is  immaterial  whether  deductions  except  for  taxes  and  losses  are 
evidenced  by  actual  disbursements  in  cash,  or  whether  evidenced  in 
such  other  way  as  to  be  properly  acknowledged  by  corporate  officers 
and  so  entered  on  books  of  the  corporation  as  to  constitute  a  liability 
against  assets  of  corporation  making  the  return.  Except  as  the  same 
may  be  modified  by  provisions  of  the  act,  limiting  deductions  and  au- 
thorizing others,  the  net  income  as  returned  for  the  purpose  of  the  tax 
should  be  the  same  as  that  shown  by  books  or  annual  balance  sheet. 
(Art.  158,  Reg.  33.) 

Accounts  Payable:  Representing  ordinary  necessary  expenses  of 
maintaining  and  operating  business  and  property  of  corporation,  if 
actually  charged  into  the  expense  account,  and  entered  on  books  as  to 
constitute  a  liability  against  assets  of  company,  and  so  treated  in  prep- 
aration of  return  of  annual  net  income,  they  will  not  be  included  in 
deduction  in  year  in  which  they  are  actually  paid  in  cash,  or  its  equiva- 
lent, such  accounts  payable  may  be  deducted  from  gross  income  of 
year  in  which  expenses  were  incurred. 

This  ruling  applies  only  to  accounts  payable  representing  ordinary 
and  necessary  expenses  of  maintaining  and  operating  business;  that  is, 
to  such  expenses  as  are  incurred  by  corporation  in  producing  gross 
income  which  is  required  to  return.  (Acting  Commissioner  David  A. 
Gates,  March  2nd,  1915.) 


82  TREASURY  DECISIONS 

Accounts  Receivable  Are  Income  for  the  Year  Created:  The  net 
income  of  the  individual  in  the  mercantile  business  should  be  ascertained 
from  his  books,  and  the  actual  inventory  of  his  merchandise  which  is  in 
accordance  with  established  procedure,  in  all  mercantile  businesses. 

Value  at  Which  Stock  Is  Carried  on  the  Books  of  the  Owner  Is  Not 
Conclusive  Evidence  of  Its  Actual  Value:  U.  S.  v.  Guggenheim  Explora- 
tion Co.  U.  S.  District  Court,  S.  D.,  N.  Y.  (238  Fed.  231.) 

The  Guggenheim  Exploration  Co.  and  the  American  Smelting  and 
Refining  Co.  were  owned  in  1905  by  practically  the  same  stockholders. 
By  arrangement  between  the  two,  the  American  Smelters  Exploration  Co. 
was  organized.  The  Guggenheim  Co.  turned  over  to  it  certain  property 
which  was  valued  by  directors  of  the  American  Smelters  Exploration  Co. 
at  $49,000,000.00,  and  preferred  and  common  stock  to  the  aggregate  par 
value  of  forty-nine  million  dollars  was  issued  in  payment  therefor  to 
the  Guggenheim  Company.  The  Guggenheim  Company  disposed  of  most 
of  this  stock  almost  immediately  thereafter,  but  retained  112,490  shares 
of  the  common  stock  carrying  it  on  its  books  at  a  nominal  valuation  of 
$1.00  until  1911,  when  these  shares  were  sold  to  the  American  Smelting 
and  Refining  Co.  for  $6,749,400.00,  or  $60.00  per  share.  No  shares  of 
common  stock  of  the  American  Smelters  Exploration  Company  had  been 
sold  on  the  market  prior  to  this  transaction.  Consequently  there  was 
no  indication  of  its  value  such  as  would  have  been  given  by  market  prices. 

The  government  claimed  that  the  difference  between  the  book  value 
of  the  stock  and  the  sum  received  for  it  upon  its  sale  constituted  a  profit 
upon  which  a  tax  was  due,  and  the  amount  not  having  been  included 
in  the  1911  return  of  the  company,  this  suit  was  commenced  by  the 
government  for  the  recovery  of  the  tax. 

The  court  HELD  that  bookkeeping,  facts  do  not  constitute  income 
but  only  real  facts  do.  The  burden  of  proof  was  upon  the  government 
to  show  by  fair  preponderence  of  evidence  that  the  stock  was  worth 
but  one  dollar  ($1.00).  The  enhanced  value  of  property  which  accrues 
in  the  gradual  increase  in  its  value  during  a  series  of  years  prior  to  an 
effective  date  of  an  Income  Tax  Law  does  not  become  income,  gains  or 
profits  taxable  under  such  act.  (Citing  236  Fed.  653.)  The  court  decided 
that  there  is  no  income,  gain  or  profit  accruing  to  the  defendant  during 
the  taxable  year  in  question. 

Additions  and  Betterments:  Amounts  expended  for  this  purpose 
constitute  an  increase  in  capital  investment  and  are  not  proper  deduc- 
tions. (Art.  118,  Reg.  33.) 

Expenses  of  administration  of  an  estate,  such  as  court  costs,  attor- 
ney's fees,  etc.,  are  chargeable  against  corpus  of  estate  and  are  not 
allowable  deductions  in  return  of  fiduciary  in  Form  1041.  (T.  D.  2090.) 

Agents:  Agents  not  acting  in  fiduciary  capacity  have  no  responsi- 
bility to  the  withholding  of  tax  or  making  return  of  income  turned  over 
to  resident  aliens  or  citizens  of  the  United  States,  but  responsible  rep- 
resentatives in  charge  of  income  of  non-resident  aliens  must  make 
return  on  Form  1040,  revised,  and  pay  tax  thereon.  (T.  D.  2090.) 

An  agent  in  entire  charge  of  property  executing  leases,  collecting 
rents,  and  paying  expenses  and  charges  in  connection  with  same  out  of 
such  funds  as  collected,  turning  over  net  proceeds  to  his  principal  by 
virtue  of  power  of  attorney  conferred  upon  him,  is  not  a  fiduciary 
within  the  meaning  of  the  Income  Tax  Law.  (T.  D.  2135.) 

There  may  be  fiduciary  relationship  between  an  agent  and  a  prin- 
cipal, but  the  word  agent  does  not  denote  a  fiduciary  within  the  meaning 
of  the  Income  Tax  Law.  (T.  D.  2090.) 

Real  estate  agents  not  required  to  deduct  and  withhold  normal  tax 
from  rents  collected,  though  amount  be  in  excess  of  $3,000.  Agent 
stands  in  place  of  landlord,  and  receives  money  in  the  same  capacity 
as  the  landlord  would  receive  same.  (T.  D.  2090.) 

Withholding  Agent's  Return  When  Form  1038  Filed:  Withholding 
agent  should  make  entries  on  Form  1042  from  facts  before  him  after 
receiving  authority  from  collector  for  refundment  of  part  of  amount 


TREASURY  DECISIONS  83 

previously  withheld.  When  he  has  received  notification  of  amount  of 
tax  to  be  refunded  he  has  sufficient  information  to  make  correct  entries. 
(T.  D.  2135.) 

Debtor  May  Appoint  Withholding  Agent:  In  matters  pertaining  to 
collection  of  tax  upon  filing  with  collector  for  the  district  a  proper 
notice  of  such  appointment.  (Art.  38,  Reg.  33.) 

Paying  Agent,  Notice  of  Appointment  of:  This  notice  should  be 
placed  on  file  in  office  of  collector  of  the  district  in  which  debtor  cor- 
poration has  principal  place  of  business,  and  said  collector  should  notify 
collector  for  the  district  in  which  withholding  agent  is  located.  (T.  D. 
2135.) 

Withholding  agent  required  to  file  return  with  collector  for  district 
where  he  is  located,  and  not  with  collector  for  district  in  which  debtor 
corporation  is  located.  (T.  D.  2135.) 

Agent,  Authorized,  May  Sign  Certificate:  Authorized  agents  may 
sign  certificates  for  persons  for  whom  they  act,  and  withholding  agents 
with  whom  such  certificates  are  filed,  if  satisfied  with  identity  of  persons 
so  signing,  shall  so  mark  certificate,  giving  name  and  address  of  person 
thus  certifying.  Certificates  so  verified  may  be  accepted  without  ques- 
tion as  to  authority  of  such  agent.  (Art.  43,  Reg.  33.) 

Withholding  Agents  May  Substitute  Their  Own  Certificates  for 
Certificates  Attached  to  Coupons  Presented  for  Collection:  Responsible 
banks,  bankers,  and  collecting  agents  receiving  coupons  for  collections 
with  certificates  of  ownership  attached,  may  substitute  for  said  certifi- 
cates its  own  certificates  Form  1058  for  exemptions  claimed  or  Form 
1059  for  exemptions  not  claimed,  and  shall  keep  a  complete  record  of 
each  transaction. 

Annual  List  Return  of  Withholding  Agent:  Annual  list  return 
(Form  1013)  in  duplicate  is  required  of  debtor  or  withholding  agent 
of  normal  tax  withheld  from  interest  payments  made  upon  bonds  or 
other  similar  obligations.  (Art.  50,  Reg.  33.) 

In  all  cases  annual  list  return  required  of  withholding  agents  (of 
which  monthly  return  will  form  a  part  as  required  by  regulations) 
should  be  made  and  sworn  to  and  filed  as  now  required  by  existing 
regulations,  and  the  jurat  for  annual  return  will  cover  entire  returns 
thus  made.  (T.  D.  1997.) 

Withholding  Agent  not  required  by  law  to  forward  to  collector 
tax  withheld  by  him.  until  after  notice  of  assessment,  and  then  pay- 
ment should  be  made  on  or  before  June  30th  of  each  year.  (T.  D.  2131.) 

Tax  Deducted  by  Collecting  Agency,  Debtor  Does  Not  Again  De- 
duct Tax,  but  in  Lieu  Thereof  Delivers  to  Collector  Certificates  of  Such 
Collecting  Agency:  A  certificate,  Revised  Form  1002,  should  accom- 
pany coupon  to  debtor  corporation  in  order  that  normal  tax  may  not 
be  withheld  again,  and  should  coupons  pass  through  hands  of  other 
collecting  agencies,  debtor  corporation,  upon  receipt  of  Form  1002, 
should  treat  such  certificate  as  an  exemption  certificate.  (T.  D.  2135.) 

Alien,  Agent  Of:  Whether  an  individual  or  a  corporation,  for 
non-resident  alien,  should  execute  Form  1040,  Revised,  for  the  prin- 
cipal when  he  is  liable  for  tax  on  income  passing  through  agent's  hands. 
(T.  D.  2135). 

Alien  Real  Estate  Agent  who  collects  rents  from  property  owned  by 
non-resident  aliens,  pays  for  repairs  and  maintenance,  and  submits  bal- 
ance to  his  principal  comes  within  (T.  D.  2109)  and  (T.  D.  2313)  is 
required  to  make  return  on  Form  1040,  Revised,  accounting  only  for 
funds  payable  by  him  to  non-resident  beneficiary. 

Commission  Retained  by  Life  Insurance  Agent  on  his  own  policy  is 
held  to  be  income  accruing  to  agent.  (T.  D.  2137.) 

Foreign  Corporations  and  Fiscal  Agents  Defined:  "Foreign  cor- 
porations," as  used  in  T.  D.  1992,  was  intended  to  include  municipal 
private  corporations  holding  charters  under  laws  of  foreign  countries, 
and  "fiscal  agents"  are  referred  to  as  financial  agents  in  ordinary  sense, 


84  TREASURY  DECISIONS 

upon  whom  law  casts  duties  with  reference  to  withholding  tax,  as 
are  imposed  upon  withholding  agents  of  domestic  corporations. 

When  a  foreign  government  has  fiscal  agents  in  the  United  States 
for  the  purpose  of  paying  interest  on  its  obligations,  such  agents  will 
be  charged  with  the  duty  of  withholding  and  paying  tax  on  such 
interest  payments,  except  to  extent  of  exemption  claims. 

When  such  foreign  corporations  have  issue  of  bonds  payable  in 
the  United  States  or  without  the  United  States  at  option  of  owner  of 
bonds  and  where  coupons  from  such  bonds  are  presented  for  payment 
to  fiscal  agents  in  the  United  States  of  such  foreign  corporations,  or 
to  a  bank,  or  collecting  agency  with  ownership  certificate  attached, 
then  in  all  such  cases  said  coupons  shall  be  treated  as  domestic  items, 
and  aforesaid  fiscal  agents  charged  with  duties  and  responsibilities  of 
withholding  tax. 

i  Where,  however,  such  coupons  are  not  presented  with  such  owner- 
ship certificates  attached,  they  shall  only  be  received  by  licensed  bank 
or  collection  agency,  and  when  so  received  shall  be  treated  as  foreign 
items. 

This  ruling  is  made  in  explanation  and  amendment  of  T.  D.  1992, 
and  other  applicable  regulations.  (T.  D.  2006.) 

Interest  on  Registered  Foreign  Bonds  Payable  in  the  United  States 
to  Fiscal  Agents:  Where  foreign  corporation  has  an  issue  of  registered 
bonds  the  interest  on  which  is  payable  to  a  fiscal  agent  in  the  United 
States,  certificates  of  exemption  may  be  filed  with  said  fiscal  agent  in 
manner  and  form  as  prescribed  by  T.  D.  1974,  and  payments  shall  be 
made  in  accordance  with  provision  of  same.  (T.  D.  1992.) 

License  Required  For  Branch  Offices:  Of  Collecting  Agents;  When 
any  person,  firm  or  corporation  shall  have  branch  offices,  and  desire  to 
collect  foreign  items  through  branch  offices,  the  application  for  a  license 
or  licenses  shall  be  made  by  person,  firm  or  corporation  through  its 
principal  office.  Application  for  licenses  in  such  cases  shall  be  made 
to  collector  of  internal  revenue  for  district  in  which  home  office  is 
located.  (Art.  57  Reg.  33.) 

Foreign  Corporations  Doing  Business  by  Agent:  Law  provides 
that  normal  tax  imposed  by  it  shall  be  collected  upon  entire  net  income 
accruing  to  foreign  corporations  from  business  transacted  or  capital  in- 
vested in  this  country.  Such  corporation  may  transact  business  or  have 
capital  invested  in  this  country  through  an  agent  as  though  it  were  in- 
vesting the  same  direct  from  its  home  office  through  branch  office  in  the 
United  States.  An  agent  doing  business  in  this  country,  buying  and 
selling  products  of  foreign  corporations,  is  to  all  intents  a  branch  of 
such  corporation  in  transacting  business  in  this  country. 

Buying  and  selling  of  products  in  this  country  through  local  agent 
on  behalf  of  such  corporation  is  transacting  business  within  meaning 
of  Federal  Income  Tax  Law  in  this  country,  and  such  corporation  will 
be  required  to  make  return  of  annual  net  income  covering  business  so 
transacted.  (T.  D.  2137.) 

When  a  foreign  corporation  sends  a  representative  to  this  coun- 
try to  solicit  business,  merchandise  thus  sold  to  be  shipped  direct  to 
consignee,  held  that  such  corporation  is  transacting  business  in  this 
country. 

A  corporation  thus  conducting  business  in  this  country  is  required 
to  make  return  even  if  such  representative  has  only  a  mailing  address 
in  this  country  and  returns  should  be  made  to  Collector  of  District  in 
which  such  representative  has  his  mailing  address.  (T.  D.  2161.) 

Agricultural  Organizations:  Corporations  owning  sugar  or  other 
plantations,  and  disposing  of  the  product  thereof  held  to  be  operating 
for  profit  and  not  entitled  to  exemption  as  agricultural  organizations. 
(T.  D.  2090.) 

Aliens,  Resident:  That  place  where  an  individual  has  his  per- 
manent home  and  principal  establishment,  and  to  which  when  absent 
he  has  intentions  of  returning;  indicates  permanency  of  occupation  as 


TREASURY  DECISIONS  85 

distinct  from  lodging  or  temporary  occupation.  HELD:  that  where 
for  business  purposes  or  otherwise  an  alien  is  permanently  located  in 
the  United  States;  has  there  his  principal  establishment  and  there  so 
occupied  or  employed,  even  though  his  domicile  may  be  without  the 
United  States,  he  will  be  held  within  the  definition  of  *  *  *  "Every 
person  residing  in  the  United  States,  though  not  a  citizen  thereof." 
(T.  D.  2242). 

Aliens,  Intending  to  Become  Permanent  Residents:  Aliens  coming 
to  the  United  States  with  the  intention  of  becoming  resident  citizens 
within  the  meaning  of  the  Income  Tax  Statute,  may  establish 
that  fact  and  have  privilege  of  resident  alien  by  filing  with  withholding 
agents  a  certificate  in  (Form  1078)  under  oath,  certificate  shall  be  filed 
by  withholding  agents  with  Collectors  of  Internal  Revenue  as  justifi- 
cation for  withholding  on  basis  of  "residence"  in  the  United  States. 
(T.  D.  2242). 

Alien  Individuals,  Non-Residents:  An  American  Woman  who  mar- 
ries a  foreigner  takes  the  nationality  of  her  husband.  (T.  D.  2090). 

Aliens,  Royalties  Received  by  Non-Resident :  Royalties  paid  non- 
resident aliens  under  agreement  of  purchase  of  certain  patent  rights, 
payments  being  based  upon  quantity  of  goods  produced  by  use  of  said 
patents;  held  to  be  income  accruing  to  said  individual  by  reason  of 
property  owned  or  business  carried  on  within  the  United  States;  the 
corporation  or  individual  purchasing  and  using  patent  rights  required  to 
make  return  of  income  therefrom  on  (Form  1040),  revised,  and  pay  tax, 
normal  and  additional  assessed  upon  such  income.  (T.  D.  2137). 

Aliens,  Interest  on  Bonds,  Dividends:  Income  accruing  non- 
resident aliens  in  the  form  of  interest  from  bonds  and  dividends  on 
the  stock  of  domestic  corporations  is  subject  to  the  income  tax  imposed 
by  the  act  of  October  3d,  1913.  (T.  D.  2313). 

Aliens,  Non-Resident,  Additional  Tax:  Non-resident  aliens  are 
subject  to  additional  tax  or  sur-tax  the  same  as  a  citizen  of  the  United 
States  or  resident  thereof. 

Dividends  on  Stock  of  Domestic  Corporations  Received  by  Non- 
Resident  Aliens:  Dividends  on  stock  of  domestic  corporations  which 
pay  tax  on  their  net  income  are  not  subject  to  the  normal  tax  when 
received  by  individuals.  They  are  subject  to  the  normal  income  tax  of 
corporations  and  subject  to  the  additional  tax  only  as  to  individuals. 
(T.  D.  2109.) 

Aliens,  Method  of  Claiming  Exemption  by  Non-Resident:  Foreign 
Dividends  Payable  in  the  United  States;  Exemption  Certificate 
1063  as  provided  in  T.  D.  1998  is  made  applicable  to  said  persons  in 
claiming  exemption  from  income  tax  on  dividends  payable  in  the 
United  States  from  stock  of  foreign  corporations.  (T.  D.  2012). 

Exemption  May  Be  Claimed  for  Non-Resident  Aliens  by  Responsi- 
ble Bank:  A  certificate  (Original  Form  No.  1071)  is  provided  which 
may  be  executed  by  responsible  banks  or  bankers,  foreign  or  domestic, 
on  behalf  of  non-resident  owners  of  stock  of  foreign  corporations  for 
the  purpose  of  claiming  exemption.  (T.  D.  2030). 

T.  D.  2030  and  all  rulings  heretofore  made  which  are  in  conflict 
herewith  are  hereby  superseded  and  repealed.  (T.  D.  2313). 

A  certificate  will  be  provided  to  take  the  place  of  Form  1071. 
(Letter  signed  by  Acting  Commissioner  David  A.  Gates,  dated  April 
5th,  1916.) 

For  making  effective  the  provisions  of  T.  D.  2313  there  are  hereby 
provided  for  use  after  July  1,  1916,  two  certificates,  to  be  known  as 
Form  *  *  and  Form  1071  Revised.  Certificate  Form  1071  Re- 

vised will  be  printed  by  the  Government  and  furnished  without  cost. 
Banks  desiring  to  furnish  their  own  certificates  may  do  so,  but  said 
certificates  must  conform  in  every  description  as  used  by  the  Gov- 
ernment. 

Aliens,  Returns  and  Payment  of  Tax  by  Non-Resident:  The 
liability  to  render  personal  returns  on  or  before  March  1st,  next 


86  TREASURY  DECISIONS 

succeeding  the  tax  year,  of  annual  net  income  from  sources  within  the 
United  States  during  the  preceding  calendar  year,  attaches  to  non- 
resident aliens.  Therefore  a  return  on  Form  1040  Revised  is  required 
except  where  total  tax  liability  has  or  is  to  be  satisfied  *  *  *  by 
personal  return  on  Form  1040  Revised  rendered  in  their  behalf.  Re- 
turns should  be  rendered  to  the  collector  of  the  district  in  which  non- 
resident alien  carries  on  his  principal  business,  or  in  the  absence  of 
principal  business  within  the  United  States  and  in  all  cases  of  doubt, 
to  the  Collector  of  Internal  Revenue  at  Baltimore,  Maryland.  (T.  D. 
2313). 

Returns  in  Payment  of  Tax  by  Agents  or  Representatives:  The 
responsible  heads  or  representatives  of  non-resident  aliens  in  charge  of 
property  owned  or  business  carried  on  within  the  United  States,  shall 
make  return  on  Form  1040  Revised,  and  shall  pay  all  taxes  assessed 
upon  the  income  received  by  them  in  behalf  of  their  non-resident  alien 
principals.  (T.  D.  2109). 

Aliens,  Non-Resident  Returns  and  Payment  of  Tax  on  Income 
From  Domestic  Corporations:  Incomes  derived  by  non-resident  aliens 
from  domestic  corporations  are  subject  to  the  Federal  Income 
Tax,  normal  or  additional,  or  both,  as  the  case  may  be,  and  said  tax 
shall  be  paid  by  owner  of  such  income,  a  representative  having  control 
of  the  same.  In  all  cases,  the  proper  representative  in  the  United  States 
of  said  party,  shall  make  returns  to  him  on  all  such  incomes  coming 
into  his  control  as  provided  by  (T.  D.  2109  and  2313):  Provided,  where 
all  income  shall  have  been  paid  over  by  the  representative  to  his  prin- 
cipal on  or  before  September  8th,  1916,  or  where  the  stockholder  of 
record  shall  not  between  September  8th  and  December  31,  1916,  be  in 
receipt  or  have  control  of  income  of  his  principal,  said  representative 
shall  be  relieved  from  paying  said  tax,  and  leaving  the  same  a  charge 
against  his  principal,  to  be  collected  by  any  means  at  the  disposal  of 
the  Commissioner  of  Internal  Revenue;  but  where  such  representative 
shall  have  custody  or  control  subsequent  to  September  9th,  1916,  he 
shall  pay  total  tax  due  upon  said  income  of  said  principal  in  his  custody 
and  control  for  the  entire  year  1916  and  subsequent  years. 

When  actual  owner  is  non-resident  alien  individual,  a  return  shall 
be  made  whenever  the  amount  of  the  net  income  is  over  three  thousand 
($3,000.00)  dollars,  and  the  custodian  shall  pay  the  tax  found  by  such 
returns  to  be  due,  said  return  shall  be  made  on  income  tax  Form  1040. 
(T.  D.  2313)  is  hereby  amended  accordingly.  (T.  D.  2402).  (Under 
act  of  1916.) 

Agents,  Responsibilities  Of,  for  Non-Resident  Alien  Owners  of 
Domestic  Stock  and  Bonds:  The  custodian  of  securities  is,  for  in- 
come tax  purposes,  the  agent  of  the  non-resident  alien  owner,  and  as 
such  is  responsible  for  a  proper  return  of  all  the  income  that  accrues 
on  said  securities.  The  agent  is  also  charged  with  the  responsibility 
of  making  complete  return  of  all  gains  derived  from  sale,  and  being  so 
charged,  it  is  his  duty  to  place  himself  in  possession  of  all  facts  neces- 
sary for  the  termination  of  the  amount  of  profit  or  loss  which  may  arise 
from  such  sale. 

Administrators,  Executors  or  Trustees,  Returns  and  Payment  By: 
A  fiduciary  acting  as  trustee,  executor  or  administrator,  where  there  is 
only  one  beneficiary,  he  being  a  non-resident  alien,  return  shall  be  made 
on  Form  1040,  Revised;  but  where  there  are  two  or  more  beneficiaries, 
being  non-resident  aliens,  return  shall  be  made  on  Form  1041,  Revised; 
and  a  personal  return  on  Form  1040,  Revised,  for  each  of  them.  (T. 
D.  2313). 

If  income  accrues  to  a  non-resident  alien  beneficiary,  through  the 
hands  of  trustees,  they  shall  make  and  render  a  return  of  the  net  income 
for  the  person  for  whom  they  act. 

Aliens,  Non-Resident,  Deduction  at  the  Source  on  Miscellaneous 
Incomes:  All  parties  in  whatever  capacity  acting,  having  disposal 
or  control  of  profits,  gains  and  income  of  whatever  kind,  to  a  non- 


TREASURY  DECISIONS  87 

United  States,  shall  deduct  from  such  income,  regardless  of  amount,  and 
pay  to  Collector  of  Internal  Revenue  authorized  to  receive  the  same, 
such  sum  as  will  be  sufficient  to  pay  the  normal  tax,  and  shall  make  an 
annual  return  on  Form  1042.  (T.  D.  2109-2313). 

Aliens,  Non-Resident,  Deductions  for  Expenses,  Etc.,  May  Be 
Claimed  at  the  Source:  Form  1008,  revised,  claiming  the  benefit  of 
such  deductions,  may  be  filed  by  non-resident  aliens  or  their  represen- 
tatives, with  the  withholding  agent  or  Collector  of  Internal  Revenue  for 
the  district  in  which  the  return  is  required  to  be  made.  (T.  D.  2313.) 

Aliens,  Non-Resident,  Ownership  Certificates  Shall  Accom- 
pany Coupons,  Etc.:  For  the  purpose  of  declaring  ownership,  and 
recognized  banks,  and  bankers,  are  permitted,  when  authorized  by  owners 
to  sign  the  certificates  with  Forms  and  Instruction  provided  on  the 
certificate. 

Certificate  1004,  revised,  provided  to  be  furnished  with  coupons 
detached  from  bonds  or  other  obligations  of  domestic  corporations 
owned  by  non-residents  alien  individuals  or  fiduciaries,  is  hereby  revised  to 
include  firms  and  organizations;  and  a  certificate  to  be  known  as  Form 
1004,  revised  November  22nd,  1916,  is  provided  for  use  of  non-residenr 
alien  individuals,  firms,  organizations  or  fiduciaries,  for  the  purpose 
of  declaring  ownership  of  bonds,  of  domestic  corporations,  etc.,  and 
to  be  attached  to  interest  coupons  when  presenting  said  coupons  for 
premium.  (T.  D.  2399.) 

Alien,  Non-Resident  Certificates  May  Be  Printed  in  Two 
Languages:  Certificates  of  ownership  to  be  filed  by  non-resident  aliens 
shall  be  printed  in  the  English  language,  and  directly  underneath  each 
line  may  be  printed  the  text  of  said  certificate  in  a  foreign  language. 

In  executing  these  certificates,  amounts  shall  be  filled  in  by  using 
United  States  dollar  values.  These  certificates  shall  be  the  same  as 
prescribed  by  regulations  of  all  certificates  of  ownership.  (T.  D.  1926.) 

Alien,  Non-Resident  Endorsement  by  Responsible  Agent  Not 
Required:  Reputable  banks  or  collecting  agents  may  execute  certificate 
of  ownership  which  is  required  to  be  filed  by  non-resident  aliens,  and  the 
endorsement,  "Satisfied  as  to  the  identity  and  responsibility  of  agents," 
is  not  required. 

Non-Resident  Alien,  Specific  Exemptions  May  Not  Be  Claimed 
at  the  Source  By:  A  non-resident  alien  is  not  entitled  to  the  benefit 
of  the  Specific  Exemption  provided  in  Section  7  of  the  Act  dated 
September  8th,  1916,  prior  to  the  close  of  the  tax  year,  and,  therefore, 
no  exemption  certificate  for  the  use  of  a  non-resident  alien  is  provided. 

If  subsequent  to  the  close  of  the  tax  year,  but  not  later  than  March 
1st,  of  the  next  succeeding  year,  a  return  is  filed,  he  may  obtain  a  refund 
of  taxes  when  his  return  shows  his  income  to  be  less  than  three 
thousand  ($3,000.00)  dollars.  (Under  act  of  1916.) 

Aliens,  Non-Residents,  Exemptions  May  Be  Claimed  by  Re- 
sponsible Banks:  Responsible  bankers  may  claim  exemption  on  behalf 
of  non-resident  aliens  holders  of  stock  or  bonds  of  corporations  of 
foreign  countries,  for  the  purpose  of  claiming  exemption  from  the 
income  tax  on  dividends  on  such  stock  using  Form  1071,  modified, 
to  be  filed  with  foreign  bonds  when  presented  to  paying  agent  in  the 
United  States.  If  the  non-resident  alien  bond  owner  does  not  present 
his  coupon  for  payment  or  collection  to  a  bank  or  banker,  but  direct 
to  a  paying  agent  in  the  United  States,  such  coupon  should  be  accom- 
panied by  Exemption  Certificate  Form  1071,  revised,  so  modified  to  show 
personal  ownership  of  bonds. 

Tax  Deductible  at  Source  on  Interest  from  Domestic  Obligations 
Accruing  to  Non-Resident  Alien  Partnerships:  Under  the  act  of  Sep- 
tember 8th,  1916,  the  normal  tax  should  be  withheld  at  source  of  income 
in  the  United  States  from  income  of  non-resident  alien  firms,  co-part- 


88  TREASURY  DECISIONS 

nerships,  joint  stock  companies  or  associations,  and  insurance  compa- 
nies not  engaged  in  business  or  having  any  place  of  business  in  the 
United  States. 

The  income  withheld  is  such  derived  from  interest  on  bonds,  mort- 
gages or  deeds  of  trusts,  or  similar  obligations,  regardless  of  amount. 

Including  and  from  and  after  September  9th,  1916,  and  to  and  in- 
cluding December  31st,  1916,  normal  tax  will  be  withheld  from  such  in- 
come at  rate  of  1  per  cent  on  amount  thereof.  Including  and  from  Janu- 
ary 1st,  1917,  the  normal  tax  will  be  withheld  from  such  income  at  the 
rate  of  2  per  cent  on  the  amount  thereof.  (T.  D.  2374.) 

Alien  Non-Resident  Authorization  of  Acceptance  of  Form  1001,  Prior 
to  January  1,  1917,  When  Stamped  "Not  Exempt":  When  certificate 
Form  1001,  revised,  has  been  executed  by  non-resident  alien  organiza- 
tions, not  having  any  place  of  business  in  the  United  States,  to  accom- 
pany coupons  detached  from  bonds  or  obligations  of  domestic  cor- 
porations, they  may  be  accepted  by  debtor  corporation  prior  to 
January  1,  1917,  if  words  "not  exempt"  were  stamped  in  bold  type  across 
face  of  certificate.  Debtor  corporations  and  withholding  agents  will  be 
held  liable  under  T.  D.  2374,  for  normal  tax,  to  be  withheld  as  provided 
by  Act  of  September  8,  1916.  (T.  D.  2377.) 

Stock  Owned  by  Non-Resident  Alien  Corporation  or  Firm  Reported 
in  Name  of  Citizen  or  Resident  of  the  United  States:  When  stock  in 
domestic  or  resident  alien  corporation  whose  income  is  subject  to  normal 
tax  is  issued  in  name  of  another  than  non-resident  alien  corporation, 
dividends  on  such  stock  will  not  be  subject  to  withholding  of  normal 
tax  under  provision  of  Section  13  (f),  of  act  of  September  8,  1916,  except 
when  debtor  corporation  or  withholding  agent  have  knowledge  that 
actual  owner  of  stock  is  non-resident  alien  corporation  subject  to  with- 
holding. (T.  D.  2382.) 

Stock,  Record  Owner  Not  to  Make  Return  and  Pay  Tax  for  Non- 
Resident  Alien  Actual  Owner  of  Partnership:  When  it  shall  appear  from 
disclosure  that  actual  owner  is  non-resident  alien  partnership,  all  certifi- 
cates making  such  disclosure  shall  be  transmitted  to  collector  for  in- 
formation of  Commissioner  of  Internal  Revenue,  but  no  return  will  be 
made  for  such  partnership,  and  no  amount  retained  from  such  income 
by  representative  of  such  partnership  in  the  United  States,  until  so  in- 
structed by  Commissioner  of  Internal  Revenue.  (T.  D.  2401.) 

Stock,  Record  Owner  to  Make  Return  and  Pay  Tax  for  Non-Resident 
Alien  Actual  Owner  of  Corporation:  Where  actual  owner  is  non-resident 
alien  corporation,  and  record  owner  is  an  individual,  firm  or  corporation 
in  the  United  States,  reco'rd  owner  will  be  held  for  income  tax  purposes 
to  have  receipt,  custody,  control  and  disposal  of  income,  and  will  be 
required  to  make  return  for  actual  owner  and  pay  such  tax  found 
to  be  due.  Such  return  shall  be  made  on  Form  1031  (1030  or  1030-A), 
for  insurance  companies.  (T.  D.  2401.) 

Returns  and  Payment  of  Taxes  for  Non-Resident  Alien  Corporations 
Receiving  Income  From  Domestic  Corporate  Obligations  Through  Rep- 
resentative in  the  United  States:  Income  derived  by  non-resident  aliens 
from  domestic  corporations  is  subject  to  normal  or  additional  tax,  or 
both,  as  the  case  may  be,  and  said  tax  shall  be  paid  by  proper  repre- 
sentative having  disposal  of  same. 

In  all  cases  proper  representative  in  the  United  States  for  non-resi- 
dent alien,  with  respect  to  such  income  coming  into  his  custody,  shall 
make  return  and  pay  tax  thereon;  however,  where  all  income  should  have 
been  paid  over  by  representative  to  his  principal  on  or  before  the  first 
day  of  September  8,  1916,  or  where  stock  holder  of  record  shall  not 
between  September  8,  and  December  31,  1916,  be  in  receipt  or  have 
control  of  income  of  said  principal,  such  representative  will  be  relieved 
from  paying  such  tax,  leaving  same  a  charge  against  non-resident  aliens. 
But  where  such  representative  shall  have  in  his  custody  or  control  sub- 
sequent to  September  8,  1916,  income  of  said  principal,  he  shall  pay 


TREASURY  DECISIONS  89 

total  tax  due  upon  income  of  such  non-resident  alien  in  his  custody 
and  control  for  entire  year  1916  and  subsequent  years. 

When  actual  owner  is  non-resident  alien  individual,  a  return  shall 
be  made  whenever  amount  of  income  is  three  thousand  dollars  ($3,000) 
or  over.  (T.  D.  2402.) 

Exemption,  Method  of  Claiming  by  Non-Resident  Aliens  on  Foreign 
Dividends  Payable  in  the  United  States:  Exemption  certificate  1063 
as  provided  in  T.  D.  1998  is  extended  and  made  applicable  to  the  use 
of  such  persons.  (T.  D.  2012.) 

Exemption,  Method  of  Claiming  by  Non-Resident  Alien  on  Bonds 
When  Presenting  Coupons  to  Fiscal  Agent  in  the  United  States:  If 
non-resident  alien  bond  owner  does  not  present  his  coupons  for  payment 
or  collection  to  a  bank  or  banker,  but  direct  to  paying  agent  in  the 
United  States,  such  coupons  should  be  accompanied  by  exemption  cer- 
tificate Form  1071  revised,  so  modified  as  to  show  personal  ownership 
of  bonds.  (From  letter  signed  by  Deputy  Commissioner  L.  F.  Speer, 
and  dated  June  13th,  1916.) 

Exemption  May  Be  Claimed  for  Non-Resident  Aliens  by  Responsi- 
ble Bank:  A  certificate  is  hereby  provided  for  the  claim  of  such  exemp- 
tions by  above  said  parties  on  behalf  of  resident  alien,  owners  of  stocks 
and  bonds  of  foreign  corporations.  (T.  D.  2030.) 

Certificate  form  1071  revised  will  be  printed  on  yellow  paper  for 
such  purposes.  (T.  D.  2325.) 

Liability  of  Foreign  Fiduciaries  for  Non-Resident  Alien  Benefi- 
ciaries: In  connection  with  income  received  from  sources  within  the 
United  States  if  a  foreign  trust  company  has  charge  of  the  estate 
or  trust,  the  net  income  which  is  distributed  annually  or  periodically 
among  non-resident  alien  beneficiaries  the  fiduciary  should  execute 
a  return  on  Form  1041,  Revised,  covering  the  total  income  of  the 
estate  or  trust  derived  from  sources  within  the  United  States,  and  a 
personal  return  on  Form  1040  in  behalf  of  each  non-resident  alien 
beneficiary,  and  in  executing  the  latter  returns  the  fiduciary  may  claim 
the  benefit  of  the  personal  exemption  to  which  beneficiary  is  entitled 
under  the  provision  of  Section  7  of  the  Act  of  September  8th,  1916. 

If  a  fiduciary  has  charge  of  an  estate  in  process  of  administration 
or  settlement,  or  an  estate  or  trust,  the  net  income  of  which  is  held 
in  trust  for  the  benefit  of  unborn  or  unascertained  persons,  or  for 
future  distribution  under  the  term  of  will  or  trust,  the  estate  or  trust 
will  be  considered  a  taxable  entity  and  fiduciary  will  be  required  to 
render  a  return  on  Form  1040,  Revised  (October,  1916),  covering 
so  much  of  its  total  income  as  is  derived  from  sources  within  the 
United  States,  and  may  claim  an  exemption  of  $3,000  under  provisions 
of  Section  7. 

No  form  of  exemption  certificate  has  been  prescribed  for  the  use 
of  a  foreign  fiduciary,  as  it  is  not  permitted  under  the  law  that  such 
a  fiduciary  may  assume  liability  for  payment  of  income  tax  found 
to  be  due  on  income  derived  by  the  estate  or  trust  from  sources  within 
the  United  States  and  subject  to  withholding  of  normal  tax  at  source. 
(Form  1040,  Revised,  when  presented  for  payment  or  collection  by 
foreign  fiduciary,  and  the  interest  paid  on  such  coupons  will  be  sub- 
ject to  withholding  of  normal  tax  at  source,  but  the  benefit  of  exemp- 
tion provided  by  Section  7  after  September  8th,  1916,  may  be  granted 
to  fiduciary  when  annual  return  or  returns  required  of  him  can  be 
properly  filed.  (Commissioner  W.  H.  Osborn,  December  28th,  1916.) 

Refund  to  Non-Resident  Alien  at  End  of  Year  of  Amounts  in  Excess 
of  Liability  Withheld  at  Source  During  the  Year:  To  obtain  a  refund  of 
tax  withheld  at  source,  where  no  tax  liability  exists  by  reason  of  personal 
exemption  and  allowable  deductions,  non-resident  aliens  are  required  by 
law  to  file  or  cause  to  be  filed  with  collectors  true  and  accurate  annual 
returns  of  total  income  from  sources  in  the  United  States,  and  these 


90  TREASURY  DECISIONS 

returns  will  be  examined  in  connection  with  corresponding  withholding 
returns,  so  that  instructions  may  be  issued  by  this  office  to  withholding 
agents  to  refund  proper  amounts,  and  for  this  purpose  returns  of  aliens 
should  have  statement  attached  showing  accurately  amount  of  tax  with- 
held with  names  and  postoffice  addresses  of  all  withholding  agents.  (Act- 
ing Commissioner  David  A.  Gates,  January  25th,  1917.) 

Income  Tax  Liability  of  Bank  on  Dividends  Deposited  Direct  by 
Debtor  Corporation  to  Credit  of  Non-Resident  Alien  Stockholders:  This 
office  acknowledges  receipt  of  your  letter  of  February  6th,  1917,  repeated 
here:  "Certain  non-resident  aliens  have  money  invested  in  American 
securities;  they  have  instructed  the  corporations  in  which  their  money 
is  invested  to  have  the  dividends  deposited  to  their  credit  in  a  certain 
banking  institution.  The  banking  institution  receives  these  deposits, 
places  them  to  the  credit  of  the  parties  mentioned,  and  they  are  from 
time  to  time  at  the  disposal  of  the  non-resident  aliens,  the  bank  having 
no  further  control  over  them.  The  bank  renders  a  statement  periodically 
showing  amounts  received  and  the  balance  to  the  non-resident  aliens' 
credit.  Does  this  make  the  bank  responsible  for  the  filing  of  the  income 
tax  returns  as  agents  for  the  non-resident  aliens?"  In  reply  you  are 
advised  that  the  transaction  designated  by  you  does  not  constitute  the 
bank  an  agent  for  the  non-resident  alien  for  the  purpose  of  rendering 
income  tax  returns.  (Commissioner  W.  H.  Osborn,  February  8th,  1917.) 

Payment  of  Tax  by  Non-Resident  Alien:  This  office  cannot  author- 
ize any  departure  from  the  requirements  of  the  law,  which  are,  that  inter- 
nal revenue  taxes  are  payable  in  cash.  Certified  checks  drawn  in  favor  of 
collectors  on  national  or  state  banks  or  trust  companies  located  in  cities 
where  the  respective  collectors  deposit  their  collections,  or  such  "out  of 
town"  certified  checks  as  can  be  cashed  without  expense  to  the  govern- 
ment. (From  letter  signed  by  Deputy  Commissioner  G.  E.  Fletcher 
dated  March  31st,  1917.) 

Dividends  Paid  to  Non-Resident  Alien  Partnerships  as  Record  Own- 
ers of  Domestic  Stock:  A  non-resident  alien  partnership  which  has 
standing  in  its  name  a  large  number  of  stocks  of  United  States  corpora- 
tions, which  stocks  are  the  property  of  its  clients,  and  the  dividends  are 
mailed  directly  from  this  country  by  the  paying  corporations  to  the  non- 
resident alien  partnership  and  by  it  distributed  to  its  clients,  has  no  lia- 
bility to  execute  certificates  or  to  make  returns  but  will  be  subject  to 
being  assessed  for  the  tax  on  this  income,  unless  it  shows  that  the  income 
is  actually  collected  and  paid  to  its  clients.  There,  therefore,  appears  to 
be  an  indirect  obligation  to  furnish  this  information. 

Dividends  paid  on  American  stocks  registered  in  the  name  of  a  non- 
resident alien  partnership  are  not  subject  to  the  withholding  of  the  nor- 
mal tax  at  the  source,  under  the  provisions  of  the  Income  Tax  Act  of 
September  8th,  1916,  unless  an  income  tax  ownership  certificate,  form 
1087,  was  filed,  evidencing  the  fact  that  the  actual  owner  of  the  stock  in 
question  is  a  non-resident  alien  corporation,  etc.,  having  no  office  or  place 
of  business  in  the  United  States. 

A  foreign  co-partnership  deriving  income  from  sources  within  the 
United  States,  is  not  itself  subject  to  income  tax  under  the  provisions  of 
the  Act  of  September  8th,  1916,  but  each  of  its  individual  members  is  sub- 
ject to  that  tax,  upon  his  distributive  share  in  such  income,  and,  inas- 
much as  the  dividends  paid  on  domestic  stock  will,  in  the  absence  of  a 
showing  to  the  contrary,  be  held  to  be  income  to  the  registered  owners 
of  such  stocks,  the  foreign  co-partnership,  to  release  its  individual  mem- 
bers from  tax  liability,  should  file  with  the  debtor  or  corporation,  or  its 
duly  authorized  withholding  agent,  certificates,  form  1087,  disclosing 
actual  ownership.  (Deputy  Commissioner  L.  F.  Speer,  April  7th,  1917.) 

Withholding  Tax  at  the  Source  on  Stock  Dividends  Paid  to  Non- 
Resident  Alien  Corporations:  While  the  Federal  Income  Tax  Law  of 
September  8th,  1916,  Section  13  (f),  specifically  provides  that  dividends 
paid  to  non-resident  alien  corporations,  joint-stock  companies,  etc.,  hav- 


TREASURY  DECISIONS  91 

ing  no  office  or  place  of  business  in  the  United  States,  are  subject  to  the 
withholding  of  normal  tax  at  the  source,  it  does  not  prescribe  a  method 
to  be  followed  in  the  withholding  of  that  tax,  and,  therefore,  the  question 
as  to  how  tax  is  to  be  withheld  from  a  dividend  paid  up  in  stock  or  script, 
is  one  for  adjustment  between  debtor  corporation  and  recipient  of  divi- 
dends. 

In  view  of  the  fact  that  domestic  corporations  will  be  held  liable  for 
normal  tax  at  the  rate  of  2%  on  any  dividend  paid  on  stock  registered  in 
name  of  and  actually  owned  by  a  foreign  corporation,  joint-stock  com- 
pany, etc.;  haying  no  office  or  place  of  business  in  the  United  States,  the 
office  deems  it  proper  to  suggest  that  in  the  case  of  a  dividend  paid  in 
stock  or  script,  the  debtor  corporation  may  protect  its  own  interest  by 
requiring  the  foreign  stockholder  to  deposit  with  it,  prior  to  the  payment 
of  dividend,  an  amount  equal  to  the  tax  the  former  will  be  required  to 
pay  to  the  Federal  Government;  or  the  resolution  providing  for  the  divi- 
dend may  be  so  drawn  as  to  permit  the  debtor  corporation  in  the  case  of 
a  dividend  paid  to  a  non-resident  alien  corporation  stockholder,  to  deduct 
from  the  surplus  from  which  the  dividend  is  to  be  paid,  and  to  retain  in 
its  treasury  an  amount  sufficient  to  meet  the  withholding  requirements 
and  issue  stock  and  script  in  payment  of  the  balance  due  on  the  stock 
held  by  such  shareholders. 

Each  corporation  so  far  as  the  law  is  concerned,  must  provide  its  own 
method  for  performing  the  duties  required  of  it  as  a  withholding  agent  in 
each  case  where  that  method  is  not  specifically  provided  by  the  law. 
(Commissioner  L.  F.  Speer,  April  10th,  1917.) 

Alimony,  considered  a  personal  expense,  to  person  paying  it,  and 
not  an  allowable  deduction  in  his  return.  (T.  D.  2090.) 

Appreciation  of  Value  of  Capital  Assets  Not  Evidenced  by  Receipt 
of  Cash  or  Equivalent:  Losses  due  to  fluctuation  during  a  taxable  year, 
in  the  value  of  capital  assets,  even  though  evidenced  by  book  entries, 
do  not  constitute  losses  "actually  sustained,"  as,  within  the  meaning 
of  the  law  (Section  2,  Act  of  October  3rd,  1913)  may  be  allowable 
deduction  from  gross  income.  Losses  are  not  actually  sustained  as  a 
result  of  a  transaction  until  losses  have  been  definitely  ascertained,  and 
the  amount  they  represent  has  irredeemably  disappeared  from  the 
assets  of  an  individual  or  corporation. 

Likewise  and  conversely,  any  appreciation  in  the  value  of  assets 
due  to  appraisal,  or  adjustment  and  taken  on  the  books,  is  held  not  to  be 
income  within  the  meaning  of  the  law  until  such  appreciation  has  been 
converted  into  cash  or  its  equivalent.  A  book  entry  reflecting  enhanced 
value  of  assets  evidences  an  increase  in  net  worth  of  corporation  or  in- 
dividual for  that  year,  an  increase  which  under  adverse  conditions  may 
disappear  next  year.  An  increase  in  the  value  thus  evidenced  is  in- 
tangible, unstable,  and  is  not  such  income  contemplated  by  the  Federal 
Income  Tax  Law  for  the  purpose  of  tax. 

Returnable  and  taxable  income  is  that  realized  during  the  year. 
That  which  is  evidenced  by  receipt  of  cash  or  its  equivalent.  Until 
any  appreciation  taken  upon  the  books  has  been  so  realized,  it  will  not 
be  required  in  return  as  income. 

In  the  event  of  sale  of  the  assets,  the  increase  in  whose  value  it  has 
been  taken  upon  the  books,  the  profit  or  income  to  be  returned  as  a 
result  of  the  sale  will  be  determined  upon  the  basis  of  the  difference 
between  the  cost  and  the  selling  price  of  the  assets. 

Instructions  herein  before  given  will  not  in  any  way  affect  the 
"reasonable  allowance  for  depreciation,"  any  portion  of  the  book  value 
representing  the  value  of  "Good  will"  shall  be  eliminated  from  the  cal- 
culation, and  allowable  depreciation  being  deductable,  being  an  amount 
properly  written  off  and  charged  against  income  to  measure  the  loss 
due  to  wear  and  tear,  and  exhaustion  of  physical  property. 

Any  ruling  previously  made  by  this  office  in  conflict  with  holdings 
hereinbefore  made  are,  superseded  by  this  letter,  if  any  returns,  adjust- 


92  TREASURY  DECISIONS 

ments,  or  assessments,  made  in  accordance  with  previous  rulings  will  in 
nowise  be  affected  by  the  foregoing  instructions. 

Assessments  on  Stocks:  Assessments  on  capital  stock  by  corpora- 
tion, regarded  as  an  investment  of  capital,  and  not  an  allowable  deduc- 
tion in  return,  of  the  individual.  (T.  D.  2090.) 

Voluntary  Assessments  Paid  to  Make  Good  Deficit:  The  amount 
paid  by  stockholders  pursuant  to  a  so-called  voluntary  assessment,  are 
additional  payments  for  the  stock  which  they  hold,  and  such  payments 
are  simply  additions  to  the  capital  stock  of  the  company.  Since  amounts 
paid  on  account  of  capital  stock  issued  do  not  constitute  income  within 
the  meaning  of  the  Federal  Income  Tax  Law,  it  is  held  that  such  pay- 
ments represent  voluntary  assessments  upon  stock  held  by  individual 
stockholders,  and  do  not  constitute  income  to  be  returned  for  the  pur- 
pose of  the  income  tax. 

Special  Assessments  paid  to  local  benefits  in  connection  with  real 
estate  are  held  to  be  expenditures  which  add  to  the  value  of  the  prop- 
erty and  should  be  capitalized,  whether  such  expenditures  were  made 
prior  to,  or  subsequent  to  the  incidents  of  the  tax;  that  is  to  say,  such 
expenditures,  no  matter  when  paid,  become  in  effect  a  part  of  the 
property. 

In  the  case  of  a  holding  or  developing  company  which  has  not  yet 
reached  the  stage  of  having  any  income  of  consequence  resulting  from 
its  corporate  operations,  the  excess  of  the  carrying  charges  over  the 
incidental  income  received  may  be  added  to  and  made  part  of  the  cost 
of  the  property. 

As  a  general  proposition  involving  acquirement  and  holding  of 
property  for  further  sale  acquired  prior  to  incidents  of  tax  from  which 
there  is  but  a  normal  income,  insufficient  to  meet  carrying  charges 
it  is  proper  to  add  to  the  original  cost  of  the  property  the  carrying 
charges  of  interest,  insurance  and  taxes  actually  paid  and  from  that 
amount  deduct  the  incidental  income  which  may  have  been  received 
between  the  date  of  purchase  and  date  of  incidents  of  tax.  The  result 
thus  shown  will  be  the  cost  of  the  property  or  amount  to  be  excluded 
from  proceeds  when  sale  is  made. 

Assessment  and  Payment  of  Tax,  Amended  Return  Not  Required 
When  Audit  Reveals  Necessity  for  Further  Tax:  Hereafter  where 
an  individual  has  been  found  subject  to  further  tax  as  a  result  of  an 
audit  by  the  collector  an  amended  return  will  not  be  required. 

In  cases  where  further  tax  is  to  be  assessed  collectors  will  be 
advised  by  letter  from  the  Treasury  Department  of  the  amount  of 
further  tax  to  be  assessed  and  reasons  for  making  the  same. 

Notice  of  Assessment  May  Lawfully  Be  Given  by  Mail:  Notice  of 
assessment  (Form  17)  may  lawfully  be  given  by  mail  and  if  so  given 
presumed  to  have  been  received.  The  burden  upon  taxpayer  to  prove 
contrary  in  order  to  avoid  penalty.  (U.  S.  v.  Gen.  Inspection  &  Loading 
Co.,  204  Fed.  657.) 

Insurance  Companies,  Life:  Life  insurance  companies  are  author- 
ized to  omit  from  gross  income  such  portions,  if  any,  of  actual  premiums 
received  from  any  individual  stockholders  as  shall  have  been  paid  back 
or  credited  to  policy  holders,  or  as  an  abatement  of  his  premium.  In 
so  far  as  "deferred  dividends"  payable  at  a  stated  period  represents  a 
"portion  of  any  actual  premium  received,"  such  deferred  dividend  may 
be  included  in  amount  to  be  omitted  from  gross  income  for  year  in 
which  they  were  actually  paid  back,  credited  to  policy  holder,  or  applied 
as  an  abatement  of  premium.  In  the  case  of  dividends  credited  or 
apportioned  annually  to  policy  holder,  only  aggregate  amount  so  actually 
credited  or  apportioned  during  premium  paying  periods,  and  not  any 
accretion  thereto,  can  be  excluded  from  gross  income.  In  case  of  whole 
life  or  five-year  distribution  policies,  deferred  dividends  may  be  excluded 
from  gross  income  to  the  extent  they  are  paid  back,  or  credited  to  the 
insured.  (Art.  100,  Reg.  33.) 


TREASURY  DECISIONS  93 

Dividends  paid  by  mutual  life  insurance  companies,  representing  the 
excess  loading  of  premiums  over  cost  of  insurance  and  used  by  policy 
holders  to  reduce  subsequent  premiums  held  not  "income  receipts,"  and 
not,  therefore,  subject  to  taxation  under  corporation  tax,  act  Sec.  38. 
(Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199.) 

Insurance  Companies,  Foreign  Assessments:  In  the  case  of  as- 
sessment insurance  companies,  the  actual  deposits  of  sums  paid  to  ter- 
ritorial offices  pursuant  to  the  law  as  additions  to  guarantee  of  reserve 
funds  shall  be  treated  as  payments  required  by  law  to  reserve  funds. 

Tax:  Assessment  for  Fiscal  Year:  In  case  of  corporations  making 
returns  for  fiscal  year,  the  assessment  shall  be  made  and  notice  given 
on  or  before  the  expiration  of  ninety  days  from  date  when  returns  are 
required  to  be  filed.  (Art.  177,  Reg.  33.) 

Notice  of  Assessment  and  Demand  by  Collector  for  Tax,  Penalty  and 
Interest:  When  assessment  has  been  made,  collectors  will,  on  receipt 
of  their  return  list,  at  once  issue  preliminary  notices  of  assessments 
(Form  627),  and  where  in  any  case  the  tax  assessed  is  not  paid  before 
30th  day  of  June,  or  in  case  of  corporations  designating  their  own  fiscal 
year  within  105  days  following  the  date  on  which  return  shall  have  been 
filed,  notice  and  demand  (Form  17)  should  be  at  once  issued,  and  unless 
the  tax  in  such  case  is  paid  within  ten  days  after  such  notice,  general 
demand  for  tax,  penalty  and  interest  (Form  21)  should  at  once  be  issued. 
Immediate  notice  and  demand  (Form  17),  will,  however,  be  served  in  case 
of  failure  to  file  return  within  specified  period.  (Art.  197,  Reg.  33.) 

The  necessity  of  issuing  Form  17  is  two-fold:  First,  to  determine 
date  when  5  per  cent  penalty  accrues  and  interest  at  1  per  cent  per  month 
begins  to  run,  and,  second,  to  complete  the  government  lien  on  property 
belonging  to  the  taxpayer. 

In  special  excise  and  income  tax  assessments  a  notice  on  Form  647 
is  required  to  be  given  in  all  cases  where  required  return  is  filed  in  due 
time.  This,  however,  is  simply  a  preliminary  notice  of  assessment,  to  be 
followed,  in  case  of  non-payment,  by  formal  notice  and  demand  if  the 
law  clearly  contemplates  and  which  court  holds  to  be  necessary  before 
the  legal  taxpayer  becomes  chargeable  with  penalty  and  interest.  (T.  D. 
1995.) 

Taxes,  Suits  to  Restrain  Assessment  or  Collection  Thereof:  "No 
suit  for  the  purpose  of  restraining  the  assessment  or  collection  of  any 
tax  shall  be  maintained  in  any  court."  (Section  3224,  Rev.  St.)  See 
Dodge  v.  Wm.  H.  Osborn,  Commissioner  of  Internal  Revenue,  240 
U.  S.  118,  February  21,  1916.) 

Profit  from  Sale  or  Disposition  of  Capital  Assets:  For  purpose  of 
determining  income  resulting  from  sale  of  capital  assets  and  amount 
to  be  accounted  as  income  under  this  act,  there  shall  be  included  any 
and  all  profits  resulting  from  such  sale.  (Art.  108,  Reg.  33.) 

In  ascertaining  net  income  derived  from  sale  of  taxable  assets,  if 
such  assets  were  acquired  subsequent  to  January  1st,  1909  (on  March 
1st,  1913),  the  difference  between  selling  and  buying  price  will  consti- 
tute an  item  to  be  added  or  subtracted  from  gross  income  according  to 
whether  selling  price  was  greater  or  less  than  buying  price.  (Art.  109, 
Reg.  33.) 

Appreciation  in  Value  of  Capital  Assets  Not  Evidenced  by  Sale  or 
Other  Disposition  Thereof:  Referring  to  T.  D.  2005,  it  will  be  observed 
that  losses  due  to  fluctuation  during  taxable  year  in  value  of  capital 
assets,  even  though  evidenced  by  book  entries,  do  not  constitute  "actual 
losses  sustained"  as,  within  meaning  of  the  law  (Section  2,  Act  of  Octo- 
ber 3d,  1913),  may  be  allowably  deducted  from  gross  income.  Losses 
are  not  actually  sustained  until,  as  a  result  of  a  completed  transaction 
such  losses  have  been  definitely  ascertained  and  the  amount  they  rep- 
resent has  irredeemably  disappeared  from  assets  of  individual  cor- 
poration. 


94  TREASURY  DECISIONS 

Likewise  and  conversely  any  appreciation  in  value  of  assets  due 
to  appraisal  or  adjustment  and  taken  up  on  the  books  of  individual  or 
corporation  is  held  not  to  be  income  within  meaning  of  the  law  until 
such  appreciation,  as  a  result  of  closed  transaction,  has  been  converted 
into  cash  or  its  equivalent;  that  is,  have  been  realized  as  an  addition 
to  and  part  of  tangible  assets  of  individual  or  corporation.  A  book 
entry  reflecting  only  an  enhanced  value  of  assets  during  year  evidences 
an  increase  in  net  worth  of  corporation  or  individual  for  that  year, 
which  may  disappear  under  adverse  conditions  the  next  year.  An  in- 
creased value  thus  evidenced  is  intangible  and  is  not  income  as  con- 
templated by  the  income  tax  law. 

Returnable  and  taxable  income  is  that  actually  realized  during  the 
year  evidenced  by  receipt  of  cash  or  its  equivalent.  Until  appreciation 
taken  up  on  the  books  has  been  so  realized  it  is  not  required  to  be  re- 
turned as  income.  It  should  be  understood,  however,  that  in  the  event 
of  sale  of  assets,  increase  in  whose  value  has  been  taken  upon  the 
books,  the  profit  or  income  to  be  returned  as  a  result  of  sale  will  be 
determined  upon  basis  of  the  difference  between  cost  and  selling  price 
of  assets;  that  is,  actual  values  and  not  book  values. 

Instructions  hereinbefore  given  will  not  in  any  way  affect  "reason- 
able allowance  for  depreciation,  if  any,"  which  the  law  authorized  as 
deduction  from  gross  income,  provided  that  in  computing  the  same 
any  portion  of  book  value  representing  "good-will"  shall  be  eliminated 
from  calculation,  an  allowable  depreciation  being  an  amount  properly 
written  off  and  charged  against  income  to  measure  due  to  loss,  wear, 
tear,  and  exhaustion  of  physical  property. 

All  rulings  previously  made  by  this  office  in  conflict  with  the  hold- 
ings hereinbefore  made  are  superseded  by  this  letter,  but  any  returns, 
adjustments,  or  assessments  made  in  accordance  with  previous  rulings 
will  in  nowise  be  affected  by  foregoing  instructions.  (Letter  to  Col- 
lectors, August  14th,  1914.) 

Agricultural  and  Horticultural  Associations:  Agricultural  and  Hor- 
ticultural Associations  specifically  enumerated  as  exempt  are  held  to  be 
such  associations  as  County  Fairs,  or  like  organizations,  not  themselves 
engaged  in  such  pursuits,  but  which,  by  means  of  awards,  etc.,  are  in- 
tended to  encourage  better  production  and  no  part  of  whose  income 
inures  to  the  benefit  of  any  private  individual.  (T.  D.  1737.) 

Associations,  Fruit  Growers:  Whose  purpose  is  to  promote  mutual 
benefit  of  their  members  in  marketing  their  products,  and  not  or- 
ganized for  profit,  having  no  capital  stock  represented  by  shares,  whose 
income  is  derived  wholly  from  membership  fees,  necessary  to  meet  ex- 
penses, are  horticultural  societies  within  meaning  of  law  and  not  sub- 
ject to  make  return  or  pay  tax.  (T.  D.  2090.) 

Building  and  Loan  Associations,  Domestic:  A  domestic  Building 
&  Loan  Association  is  held  to  be  one  organized  pursuant  to  laws  of  the 
United  States,  or  of  a  State  or  Territory  thereof,  or  under  laws  appli- 
cable to  Alaska  or  District  of  Columbia.  Mutuality  in  operation  and  in 
distribution  of  profits  and  benefits  is  essential  to  exemption.  An  asso- 
ciation issuing  different  classes  of  stock  upon  which  different  rates  of 
interest  are  guaranteed  or  paid,  does  not  come  within  exempted  class. 
(Art.  87,  Reg.  33.) 

Under  the  Corporation  Excise  Tax  Law  it  was  decided  that  a  Build- 
ing &  Loan  Association  is  exempt  though  it  issue  both  prepaid  and 
installment  stock.  (Harold  v.  Park  View  &  Loan  Association,  210  Fed. 
577)  but  that  a  Building  &  Loan  Association  issuing  Preferred  Stock  is 
not  exempt.  (Pacific  Building  &  Loan  Association  v.  Hartson,  201  Fed. 
1011.) 

Private  Banks,  Income  From:  In  case  of  banks  which  have  the 
form  of  corporations  and  held  to  be  associations  within  the  meaning 
of  the  Federal  Income  Tax  Law,  it  is  not  the  purpose  of  this 


TREASURY  DECISIONS  95 

office  to  assess  against  such  banking  association  and  then  also  against 
the  individual  members.  Income  which  the  members  of  the  association 
receive  from  the  bank  because  of  their  investment  therein  will  be  con- 
sidered dividends.  (T.  D.  2152.) 

Bank  Owned  by  Individual  or  Partnership:  Where  it  is  clearly 
shown  that  a  bank  is  owned  by  one  man,  it  is  evident  such  bank  is  not 
an  association  within  the  meaning  of  the  Federal  Income  Tax  Law,  and 
therefore  will  not  be  required  to  make  return  such  as  corportaions  and 
associations  are  required  to  make,  but  if  individual  owners  have  net 
incomes  of  three  thousand  dollars  ($3,000.00)  or  more,  he  is  required 
to  make  a  return  on  Form  1040,  showing  in  such  return  income  received 
from  all  sources.  (T.  D.  2137.) 

Banks,  Private,  which  have  no  formal  organization,  but  in  the  name 
of  individuals  who  compose  the  firm,  as  John  Smith  &  Co.;  held  to  be 
co-partnerships,  and  as  such  not  required  to  make  return.  In  such 
cases,  individuals  who  compose  the  firm,  if  they  have  net  incomes  in 
excess  of  three  thousand  dollars  ($3,000.00)  are  required  to  make  re- 
turns on  Form  1040.  (Under  act  of  1916.) 

Private  Banks  as  Partnerships:  Private  banks  having  no  formal 
organization  and  transact  business  in  the  name  of  individuals  who 
compose  the  firm,  as  John  Smith  &  Co.,  held  to  be  co-partnerships, 
and  as  such  are  not  required  to  make  returns.  In  such  cases  indi- 
viduals who  compose  firm,  if  they  have  a  net  income  in  excess  of  $3,000 
will  be  required  to  make  returns  on  Form  1040,  accounting  for  the 
earnings  accruing  to  them  from  such  bank. 

Interest  on  Bank  Deposits:  Interest  on  bank  deposits,  or  on  cer- 
tificates of  deposit,  whether  paid  or  accrued  and  unpaid,  must  be  in- 
cluded in  return.  (Article  67,  Reg.  33.) 

Interest  on  Bank  Accounts  should  be  returned  as  income,  for  the 
year  in  which  credited. 

Banks,  Bankers,  Trust  Companies  and  other  Banking  Institutions 
receiving  deposits  of  money  are  not  required  to  withhold  at  source 
normal  tax  on  interest  paid  or  accruing  to  depositors,  but  all  such 
interests,  whether  paid  or  accrued  and  unpaid,  must  be  included  in 
annual  income  return  of  person  entitled  to  receive  such  interest,  whether 
on  open  account  or  on  certificate  of  deposit.  (Art.  67,  Reg.  33.) 

Banks  Receiving  for  Collection  Interest  Orders,  of  Checks  Bearing 
Endorsement:  Collecting  agents  receiving  for  collection  interest  orders 
or  checks  bearing  endorsement  may  present  said  interest  orders  or 
checks  for  collection  without  requiring  certificate  of  ownership  there- 
with. (T.  D.  1974.) 

Private  Banks:  Private  banks  which  have  form  of  corporate  or- 
ganizations, elect  officers  and  board  of  managers,  have  distinctive  name 
and  distribute  their  earnings  upon  basis  of  amount  of  capital  invested 
by  members  or  owners,  are  held  to  be  associations  and  should  make 
return  in  their  organized  capacity.  (T.  D.  2137.) 

The  holders  of  stock  or  owners  of  bank,  exempt  from  normal  tax  to 
extent  of  dividends  which  they  receive,  from  such  private  banks  as  make 
returns  in  their  organized  capacity  and  pay  income  in  accordance  there- 
with. Individual  owners  not  required  to  make  return  as  income  for 
purpose  of  normal  tax  upon  any  dividends  from  bank  whioh  pays  tax  on 
its  earnings,  but  for  purpose  of  super  tax  dividends,  should  be  re- 
turned as  income.  (T.  D.  2137.) 

When  it  can  be  clearly  shown  that  a  private  bank  is  owned  by  one 
man,  it  is  evidence  that  such  bank  is  not  an  association  within  means 
ing  of  income  tax  law,  and  therefore  such  bank  will  not  be  required  to 
make  return  as  association,  but  if  individual  owner  has  income  of  $3,- 
000  or  more,  he  will  be  required  to  make  return  on  Form  1040.  (T.  D. 
2137.) 


96  TREASURY  DECISIONS 

Gross  Income  of  Banks  and  other  financial  institutions  consist  of 
revenue  derived  from  operation  of  the  business,  including  income, 
gains,  or  porfits  from  all  other  sources,  as  shown  by  entries  on  books 
of  accounts,  with  calendar  or  fiscal  year  for  which  return  is  made. 
(Art.  96,  Reg.  33.) 

Dividends  on  Stock  of  Federal  Reserve  Banks  Are  Exempt:  Income 
or  dividends  on  the  stock  of  Federal  Reserve  Banks  is  exempt  from 
Income  Tax.  (Extract  from  Federal  Reserve  Bulletin  of  April  1st, 
1916.) 

Bank  Guaranty  Fund:  Banking  corporations,  which,  pursuant  to 
laws  of  the  state,  in  which  they  are  doing  business,  are  required  to  set 
apart,  keep  and  maintain  in  their  bank  the  amount  levied  assessed  against 
them  by  state  authorities  as  a  "depository  guaranty  fund,"  may  deduct 
from  their  gross  income  the  amounts  so  set  apart  each  year  to  this 
fund,  provided  that  such  fund  is  set  aside  and  carried  to  credit  of  the 
State  Bank  Board,  or  duly  authorized  state  officers,  and  may  be  with- 
drawn by  such  board  or  state  officers  upon  demand  for  reimbursing 
depositors  in  insolvent  banks,  provided  no  portion  of  the  amount  thus 
set  aside  and  credited  is  returnable  under  existing  laws  of  the  state  to  the 
assets  of  the  banking  corporation.  In  such  cases  the  amount  of  guar- 
antee fund  thus  levied  against  banking  corporation  and  so  set  apart, 
is  not  longer  an  asset  of  bank,  but  a  nature  of  tax  "imposed  by  author- 
ity of  the  state,"  and  as  such  authority  of  the  state,  is  deductible  from 
gross  income  of  banking  corporation.  (T.  D.  2152.) 

Taxes  assessed  against  the  stockholders  of  a  bank  and  paid  by 
bank  itself  in  behalf  of  the  stockholders  do  not  constitute  an  allowable 
deduction  from  gross  income  of  bank,  but  do  constitute  an  allowable 
deduction  in  the  return  of  the  individual.  The  amount  of  taxes  so  paid 
should  be  included  in  his  return  as  income,  said  amount  being  con- 
sidered additional  dividend  to  amount  of  taxes  paid.  (T.  D.  2135.) 

The  capital  stock  outstanding  of  a  banking  corporation  is  the  per- 
sonal property  of  individual  stockholders.  Hence,  any  tax  paid  on  the 
value  of  this  property  is  a  liability  of  the  owner,  on  the  requirement  of  a 
state  law  when  a  bank  shall  pay  for  the  stockholders  cannot  be  con- 
sidered authority  under  which  the  bank  may  deduct  from  its  gross 
income  the  taxes  so  paid. 

If  a  banking  corporation  in  the  return  of  annual  net  income  for 
the  year  1913  prior  years  afterward  deducted  from  gross  income 
amount  of  tax  paid  upon  value  of  the  capital  stock  outstanding  and  in 
the  hands  of  the  stockholders,  such  corporations  are  required  to  file 
minute  returns  in  which  amount  of  said  tax  so  paid  shall  be  eliminated 
from  deductions,  and  assessment  will  be  returned  accordingly.  (T.  D. 
2161.) 

Beneficiaries,  Dividends,  Received  Through  Fiduciaries:  Dividends 
in  the  hands  of  fiduciaries  and  belonging  to  the  beneficiaries  are  not 
subject  to  the  normal  tax,  but  subject  to  the  additional  tax  to 
the  beneficiary  whenever  the  beneficiary's  income  from  all  taxable 
sources  is  in  excess  of  $20,000.00.  (T.  D.  2090.)  (Under  act  of  1916.) 

Individual  Return  by  Beneficiary:  A  beneficiary  is  liable  for  nor- 
mal tax  upon  amount  of  net  income  derived  from  all  taxable  sources 
through  a  fiduciary,  less  amount  of  exemption  claim,  and  amount  of  tax 
withheld  at  source,  and  is  also  liable  for  additional  tax  upon  income  in 
excess  of  twenty  thousand  ($20,000.00)  dollars.  (T.  D.  2090.) 

Taxpayer  is  required  to  account  only  for  the  actual  amount  received 
from  fiduciary. 

Unless  beneficiary  is  under  some  disability  which  requires  fiduciary 
to  act,  beneficiary  will  make  own  return  and  account  for  income  tax 
upon  his  net  income.  (T.  D.  2090.) 

Beneficiary  shall  not  be  required  to  pay  again  the  normal  tax  on 
amount  on  which  tax  has  been  paid  when  such  amount  was  distributed. 
(T.  D.  1906.) 


TREASURY  DECISIONS  97 

Board,  Lodging,  Etc.,  Received  in  Lieu  of  Cash  for  Rent:  Board, 
lodging  or  other  considerations  received  in  lieu  of  rent  is  considered 
income  equal  to  the  amount  of  the  indebtedness,  in  payment  of  which 
it  is  received,  and  should  be  returned  as  income  by  its  recipient.  (T.  D. 
2135.) 

Bond  May  Be  Required  By  Commissioner  of  Internal  Revenue 
Before  Issuing  License:  Where  commissioner  is  not  sufficiently  in- 
formed as  to  responsibility  of  applicant,  or  when  in  any  case  he  deems 
it  advisable,  he  may,  upon  recommendation  of  collectors,  require  of 
applicant  a  bond,  in  duplicate,  with  satisfactory  sureties,  and  a  penal 
sum  equal  to  estimated  amount  of  tax  to  be  withheld  by  such  applicant 
during  any  one  year.  (Art.  56,  Reg.  33).  Minimum  penal  sum  to  be 
one  thousand  ($1,000.00  dollars,  and  maximum  not  in  excess  of  one 
hundred  thousand  ($100,000.00)  dollars. 

One  of  the  duplicate  copies  of  bonds  shall  be  retained  in  office  of 
collector  of  internal  revenue  with  whom  filed,  and  the  other  forwarded 
to  the  Commissioner  of  Internal  Revenue  at  Washington,  D.  C.  (T.  D. 
1909.) 

A  form  of  bond  to  be  given  in  such  cases  will  be  furnished  collectors 
upon  application  for  same.  (Art.  56,  Reg.  33.) 

Bond  For  License  Must  Be  Renewed  Annually  on  or  Before  January 
First:  Bond,  if  required,  must  be  filed  for  calendar  year  1914  and  for 
each  calendar  year  thereafter.  All  bonds  must  be  renewed  or  new 
bonds  furnished  on  or  before  January  1st,  of  each  successive  year. 
(T.  D.  1909.) 

License  Revoked  For  Failure  to  Renew  Bond:  Failure  to  give  a 
renewed  bond  in  cases  where  bond  is  required  will  automatically  revoke 
license.  (T.  D.  1909.) 

License  Issued  Without  Bond:  When  licenses  are  issued  without 
bond,  collector  will  each  year  inquire  into,  and  satisfy  himself  to 
financial  responsibility  of  licensee.  (Art.  56,  Reg.  33.) 

Bond  Amount  Required  For  Collecting  Agency  Having  Branch 
Offices:  The  bond  in  such  cases  shall  be  based  on  total  amount  of 
business  transacted  by  both  home  office  and  its  branches.  (T.  D.  1909.) 

Fidelity  Bond,  Premium  On:  Where  an  employee  is  required  to 
furnish  bond  incident  to  his  employment,  and  pays  premium  on  such 
bonds,  such  expense  constitutes  an  allowable  deduction  in  computing 
net  income.  (T.  D.  2090.) 

Bonds  Containing  Tax-Free  Covenant  Clause:  The  stipulation  in 
bonds  guaranteeing  non-assessability  against  them  is  a  contract  between 
the  corporation  and  the  bondholder  as  far  as  the  income  tax  law  applies 
and  are  no  different  for  this  purpose  than  bonds  carrying  no  such 
clause.  Debtor  corporation  or  its  duly  authorized  withholding  agent 
will  be  held  responsible  for  normal  tax  when  no  exemption  is  claimed. 
(T.  D.  1948.)  .  (T.  D.  2090.) 

Bonds;  Apportionment  of  Losses  Due  to  Sale  Below  Par:  Bonds 
disposed  of  for  a  price  less  than  par,  and  are  redeemable  at  par;  it  is 
held  that  because  of  fact  that  bonds  may  be  redeemed  at  their  face 
value,  the  loss  sustained  by  reason  of  their  sale  for  less  than  their  face 
value  may  be  pro-rated  over  the  period  of  life  of  the  bond.  (Art.  135, 
Reg.  33.) 

Bonds,  Loss  Incurred  by  Retirement  of:  If  bonds  were  issued  at 
par,  then  corporation  may  deduct  difference  between  par  and  price  at 
which  purchased  for  retirement. 

If  bonds  were  issued  at  a  premium,  and  such  premium  accounted 
for  as  income  for  year  and  which  issued,  then  difference  between  par 
and  the  purchase  price  may  be  deducted  as  a  loss,  but  if  premium  at 
which  bonds  were  issued  had  not  been  carried  into  income  account 
the  loss  to  be  claimed  should  be  the  difference  between  the  price  at 
which  bonds  were  issued  and  the  purchasing  price. 


98  TREASURY  DECISIONS 

In  event  that  bonds  were  issued  at  a  discount,  and  discount  was 
charged  against  earnings  of  year  in  which  issued,  the  difference  between 
purchase  price  and  par  value  may  be  considered  loss,  but  if  discount  on 
bonds  was  pro-rated  over  life  of  bond  and  annual  proportion  charged 
against  annual  income,  amount  to  be  charged  off  as  loss  for  year,  in 
which  bonds  were  purchased  for  retirement,  should  be  the  difference 
between  price  at  which  bonds  were  issued  and  purchase  price  minus 
an  allowance  for  sums  charged  off  annually  on  account  of  pro-rated 
discount  on  such  bonds.  (Acting  Commissioner  J.  E.  Fletcher,  March 
3rd,  1915.) 

Bonds,  Retirement  of:  Where  bonds  under  contract  provision  are 
retired  with  interest  period  and  prior  to  expiration  of  full  term  of  bonds, 
ownership  certificates  are  required,  and  should  cover  that  part  of  inter- 
est period  between  beginning  of  such  period  and  date  of  retirement. 
(T.  D.  2090.) 

Bonds  Purchased  by  Trustee  Under  Mortgage  Deed  of  Trust,  Not 
Required:  It  is  held  in  the  case  where  corporate  bonds  are  purchased 
"by  trustee  under  mortgage  deed  of  trust  out  of  money  from  sinking 
fund  when  bonds  are  not  retired  or  cancelled  but  held  alive  and  inter- 
est continued  on  coupons,  interest  paid  to  trustee  being  held  for  account 
of  corporation  issuing  bond"  that  trustee  merely  acts  as  agent  for 
debtor  corporation,  and  that  Corporation  itself  or  trustee  if  authorized 
to  act  as  agent,  should  execute  income  tax  certificates,  (Form  1001,  Re- 
vised) to  accompany  coupons  detached  from  bonds.  It  is  held  that  if 
legal  title  to  bonds  rest  with  trustee  he  should  execute  exemption  cer- 
tificate (Form  1015,  Revised)  or  (1019,  Revised)  to  accompany  coupons 
detached  from  bonds  and  presented  for  payment.  (Commissioner  W.  H. 
Osborn,  December  6th,  1916.) 

Bonds,  Each  Issue  Require  Separate  Certificates  of  Ownership: 
Certificates  are  made  on  prescribed  forms  by  each  owner  of  bonds,  for 
coupons  or  interest  orders  for  each  separate  issue  of  bonds  or  obliga- 
tions of  each  debtor. 

Certificates  to  be  Executed  by  Individuals  to  Accompany  Coupons 
in  Case  of  Registered  Bond:  If  owners  of  bonds  are  individuals,  who 
are  citizens  or  residents  of  the  United  States,  ownership  certificates  shall 
accompany  coupons.  Or  the  interest  on  registered  bonds  shall  be  filed 
with  payor,  and  certificates  shall  describe  bonds  and  show  amount  of 
coupons  attached  and  due  such  owner,  and  name  and  address  of  owners, 
and  if  registered,  names  other  than  owners,  such  names  and  addresses 
should  also  be  given.  Certificates  shall  also  show  whether  claim  is 
made  for  exemption  or  not,  and  must  be  signed  by  claimants,  using  their 
ordinary  business  signatures.  Also  postoffice  and  street  address  of 
claimants,  and  date  signed.  (Art.  42,  Reg.  33.) 

Bonds,  Purchase  and  Sale  of  Between  Interest  Dates:  Where  such 
a  bond  is  purchased,  seller  is  not  required  to  execute  an  ownership 
certificate,  but  such  certificate  will  be  required  from  purchaser  of  bond 
when  coupon  is  attached  and  presented  for  payment. 

Bonds,  Foreign  Owned,  Belonging  to  American  Citizens  or  Resi- 
dents: Where  certain  American  bonds  which  are  property  of  Swiss 
citizens,  but  which  belongs  to  an  American  citizen,  coupons,  when 
making  collections,  should  be  accompanied  by  certificate  of  ownership 
signed  by  or  in  behalf  of  the  person  entitled  to  receive  the  income. 

Tax  Previously  Withheld  May  Be  Paid  to  Creditor  on  Filing  Cer- 
tificate of  Exemption  in  Case  of  Interest  on  Registered  Bonds:  Where, 
because  of  failure  to  file  certificates  claiming  exemption,  in  compliance 
with  the  regulations,  interest  has  been  withheld  for  payment  of  normal 
tax,  debtors  may,  upon  filing  proper  certificates  as  provided  in  Art.  42 
to  extent  of  exemption  claimed,  release  and  pay  amount  of  such  income 
withheld.  (T.  D.  1974.) 

Tax  Withheld  on  Salary  and  Bonus:     If  an  employee's  total  com- 


TREASURY  DECISIONS  99 

N, 

pensation  is  paid  to  him  at  one  time  withholdings  should  occur  at  that 
time;  and  both  the  company's  withholding  return  and  employee's  indi- 
vidual return  should  take  consideration  of  this  item  for  the  year  in 
which  it  is  paid.  Where  part  of  the  compensation  is  in  the  form  of 
monthly  salary  and  part  in  the  form  of  a  bonus  not  fixed  until  after 
January  1st  of  the  succeeding  year,  the  two  parts  of  any  one  year's 
compensation  cannot  be  considered  together  for  the  purposes  of  with- 
holding the  tax  and  making  returns;  but  the  fixed  salary  of  one  year 
should  be  considered  together  with  the  bonus  received  on  or  after 
January  1st  of  that  year.  Thus,  if  the  services  were  received  in  the 
year  1914,  the  employee's  compensation  would  be  liable  to  withholding 
whenever  fixed  salary  in  bonus  paid  on  or  after  January  1st,  1914, 
amounted  to  $3,000,  subject  to  the  exemptions  claimed  under  the  law. 
The  bonus  to  be  paid  on  or  after  January  1st,  1915,  belong  to  the  tax 
year  1915,  together  with  the  fixed  salary  received  during  1915.  (T.  D. 
2135.)  (Under  act  of  1916.) 

Bonus  is  considered  taxable  income:  Special  payments  by  corpora- 
tion as  extra  compensation  to  its  employees  may  be  deducted  from 
gross  income  if  it  is  shown  that  compensation  is  paid  for  services  ren- 
dered. If  such  compensation  is  a  gratuity  or  voluntary  payment  for 
which  no  service  is  rendered,  the  amounts  so  paid  are  not  deductible. 
(T.  D.  2152.) 

Salaries  Paid  by  Exempt  Organizations  are  subject  to  the  Income 
Tax  Laws  and  should  return  as  income  by  the  individuals. 

Living  Quarters  as  Part  of  Salary:  Where  living  quarters  are 
furnished  in  addition  to  salaries  the  rental  value  of  same  is  regarded  as 
income  subject  to  tax.  (T.  D.  2090.) 

Gifts,  Gratuities  or  Bonuses  to  Employees:  Gifts  or  gratuities  to 
employees  in  service  of  a  corporation  are  not  properly  deductible  in 
ascertaining  income.  (T.  D.  2090.) 

Bookkeeping,  System  Required:  No  particular  system  of  bookkeep- 
ing or  accounting  will  be  required  by  this  department.  However,  the 
business  transacted  by  corporation  must  be  so  recorded  that  each  and 
every  item  set  forth  in  return  of  annual  net  income  may  be  readily 
verified  by  examination  of  the  books  of  account.  (Art.  182,  Reg.  33.) 

Corporations'  Books:  Must  Confirm  Annual  Returns:  The  books 
of  a  corporation  are  assumed  to  reflect  the  fact  as  to  its  earnings,  income, 
etc.  Hence,  they  will  be  taken  as  the  best  guide  in  determining  net 
income  upon  which  tax  imposed  by  this  act  is  calculated.  Except,  as 
the  same  may  be  modified  by  provisions  of  the  law,  wherein  certain 
deductions  are  limited,  the  net  income  disclosed  by  books  and  verified 
by  the  annual  balances,  shall  be  the  same  as  that  returned  for  taxation. 
(Art  183,  Reg.  33.) 

Corporations,  Domestic:  Return  of  Whose  Books  Are  Kept  Abroad: 
In  case  of  a  domestic  corporation  whose  books  of  account  and  other 
data  are  kept  in  foreign  countries,  return  should  be  made  to  the  Collector 
of  Internal  Revenue  of  the  district  in  which  they  have  their  principal 
office  in  this  country.  Otherwise,  return  of  annual  net  income  of  said 
corporation  should  be  made  to  the  collector  of  the  district  in  which  are 
located  the  statutory  offices  of  the  corporation.  (T.  D.  2137.) 

Corporation  Keeping  Books  in  Accordance  With  Standard  Systems 
of  Accounting  Make  Their  Returns  on  Basis  on  Which  Their  Books  Are 
Kept,  Provided  the  Books  so  Kept  and  Returns  Made  Reflect  the  True 
Net  Income  of  the  Corporation  of  Each  Year:  Under  provision  Sub- 
Paragraph  (d)  of  Section  13  of  Title  (l)  of  the  Act  of  September  8th, 
1916,  it  will  be  permissible  for  corporations  which  accrue  on  their  books 
monthly  or  other  stated  periods,  amounts  sufficient  to  meet  fixed  annual 
or  other  changes,  to  deduct  from  their  gross  income  so  accrued,  pro- 
vided such  accruals  approximate  as  nearly  as  possible  the  actual  liabili- 
ties for  which  the  accruals  are  made,  and  provided  that  in  cases  wherein 


100  TREASURY  DECISIONS 

deductions  are  made  on  the  actual  basis  as  hereinbefore  indicated,  income 
from  fixed  and  determinable  sources  accruing  to  corporations  must  be 
returned,  for  purpose  of  the  tax,  on  the  same  basis. 

In  cases  wherein  pursuant  to  consistent  practice  of  accounting  of 
corporations,  or  pursuant  to  requirement  of  Federal,  State  or  Municipal 
authority,  corporations  set  up  and  maintain  reserve  to  meet  liabilities,  the 
amount  of  which  on  the  date  of  payment  or  maturity  of  which  is  not 
definitely  determined,  or  determinable,  at  the  time  the  liability  is  in- 
curred, it  will  be  permissible  for  the  corporations  to  deduct  from  their 
gross  income  the  amounts  credited  to  such  reserves  each  year,  provided 
that  amounts  deductible  on  account  of  reserves  shall  approximate  as 
near  as  can  be  determined  the  actual  amounts  which  experience  has 
demonstrated  will  be  necessary  to  discharge  the  liabilities  incurred  during 
the  year,  and  for  the  payment  of  which  addition  to  the  reserves  were 
made;  and  provided  if  it  shall  be  found  that  the  amounts  credited  to  any 
such  reserve  is  in  excess  of  the  reasonable  or  probable  needs  of  the 
corporation  to  meet  and  discharge  the  liabilities  for  which  the  reserve 
is  credited,  excess  of  such  reserves  shall  be  at  once  disallowed  as  a 
deduction  and  restored  to  income  for  the  purpose  of  the  tax;  and  pro- 
vided further,  that  in  no  event  will  sinking  funds  or  other  reserves  set 
up  to  meet  additions,  betterments,  or  other  capital  obligations,  constitute 
allowable  deductions  from  gross  income. 

This  ruling  contemplates  that  the  income  in  authorized  deductions 
shall  be  computed  and  accounted  for  on  the  same  basis,  and  that  the 
same  practice  shall  be  consistently  followed  year  after  year.  Amounts 
paid  up  in  discharge  of  any  liability  or  obligation  for  which  a  reserve 
has  been  set  up,  and  hereinbefore  outlined,  will,  when  paid,  be  charged 
to  the  reserve  created  to  meet  it,  in  so  far  as  such  reserve  is  sufficient 
to  meet  the  liability,  provided  always  that  the  liability  is  of  a  character, 
which  constitutes  an  allowable  deduction  within  the  meaning  of  the  law. 

If  upon  investigation  it  shall  be  found  that  returns  made  upon  basis 
of  accruals  and  reserves  do  not  reflect  the  true  net  income,  the  corpora- 
tion so  failing  in  this  way  to  return  the  true  net  income  will  not  there- 
after be  permitted  to  make  its  returns  upon  any  basis  other  than  that  of 
actual  receipts  and  disbursements. 

The  reserves  contemplated  by  the  foregoing  ruling  are  those  reserves 
only  which  are  set  up  to  meet  some  actual  liability  incurred,  the  amount 
necessary  to  discharge  which  cannot  at  the  time  be  definitely  determined 
and  not  the  reserves  to  meet  losses  contingent  upon  shrinkage  in  values, 
losses  from  bad  debts,  capital  investments,  etc.,  which  losses  are  deduct- 
ible only  when  definitely  determined  as  the  result  of  a  closed  or  com- 
pleted transaction,  and  are  charged  off.  (T.  D.  2433.)  January  19th,  1917. 

Accounting  for  Dividends  Distributed  by  a  Corporation  Which  Had 
Surplus  or  Undivided  Profits,  on  March  1st,  1913:  Under  title  (1)  of  the 
Act  of  September  8th,  1916,  any  distribution  made  or  to  be  made  by  a 
corporation  out  of  its  earnings  or  profits  accrued  since  March  1st,  1913, 
and  payable  to  its  stockholders,  whether  in  cash  or  in  stock  of  the  com- 
pany, will  be  subject  to  the  income  tax  for  the  year  in  which  received. 

In  each  case  where  dividends  are  declared  and  paid  out  of  surplus  of 
profits  earned  prior  to  March  1st,  1913,  the  corporation  should  specifically 
inform  the  stockholders  that  dividends  were  declared  and  paid  out  of 
such  surplus  and  profits,  and  proper  entries  must  be  made  on  books  of 
the  corporation  showing  from  what  surplus  or  earnings  the  dividends 
were  paid.  It  is  immaterial  to  this  office  whether  dividends  are  paid 
out  of  current  earnings  or  surplus  acquired  prior  to  March  1st,  1913,  but 
for  the  purpose  of  the  Federal  Income  Tax,  it  is  necessary  this  office 
be  fully  advised  in  the  return  of  annual  net  income  whether  or  not  the 
dividends  received  was  paid  out  of  surplus  earned  prior  or  subsequent 
to  March  1st,  1913.  (Acting  Commissioner  David  A.  Gates,  and  dated 
January  23rd,  1917.) 

Calendar  Year:     It  is  noted  that  some  corporations  are  apt  to  mis- 


TREASURY  DECISIONS  101 

understand  the  rulings  of  this  office  relative  to  establishing  a  fiscal 
year  as  basis  of  its  return  of  annual  net  income.  In  this  connection 
you  are  requested  not  to  accept  a  return  made  on  any  basis  other  than 
the  calendar  year  ending  Dec.  31st,  unless  the  corporation  filing  such 
reurn  has  properly  established  a  fiscal  year.  (Letter  No.  1148  to  col- 
lectors.) 

Capital  Stock,  Proceeds  of,  Sale  of,  Are  Not  Income:  The  amount 
received  by  a  corporation  for  the  original  issue  and  sale  of  its  capital  stock 
is  held  to  be  capital  of  the  corporation.  In  cases  where  the  stock,  as  orig- 
inally issued,  is  sold  at  prices  at  greater  or  lesser  than  par  value,  neith- 
er premium  nor  discount  will  be  taken  into  account  in  determining  net 
income  of  corporation  for  year  in  which  stock  was  sold.  This  is  purely 
a  capital  transaction  and  income  is  neither  increased  nor  decreased  by 
reason  of  sale,  per  se,  of  stock  at  a  price  greater  or  less  than  its  par 
value  (T.  D.  2090.) 

Capital  Stock:  Outstanding,  Paid  Up.  Full  amount  of  stock,  as 
represented  by  the  par  value  of  the  shares  issued  is  to  be  regarded  as 
paid  up  capital  stock,  except  when  such  stock  is  assessable  on  account 
of  deferred  payments,  or  payable  in  installments,  in  which  case  the 
amount  actually  paid  on  such  shares  will  constitute  the  actual  paid  up 
capital  stock  of  corporation.  (Art.  95,  Reg.  33.) 

In  making  return  of  annual  net  income  for  purpose  of  income  tax, 
every  corporation  in  making  such  returns  must  report  under  item  1  of 
return  form  the  total  par  value  of  its  stock,  both  common  and  pre- 
ferred, outstanding,  at  the  close  of  the  year. 

Stocks  outstanding  at  the  close  of  the  year  and  upon  the  basis 
of  which  dividends  are  or  may  be  paid  was  held  to  be  paid  up  capital 
stock  within  the  meaning  of  the  law.  For  this  purpose,  it  is  immaterial 
whether  stock  be  paid  for  in  cash  or  other  assets.  The  fact  that  notes 
are  given  in  payment  of  stock  issued  and  that  notes  have  not  been  paid 
in  full  at  time  returns  are  made  is  immaterial.  (T.  D.  2137.) 

Capital  Stock  Paid  Up  and  Outstanding  When  Shares  Are  Without 
Par  Value:  "Paid  up  capital  stock,"  as  used  in  this  act,  is  held  to  mean 
that  amount  of  capital  paid  in  and  for  which  certificates  of  shares  are 
issued.  For  the  purpose  of  the  act,  it  is  not  essential  that  shares,  when 
issued,  shall  have  set  put  therein  a  nominal  or  par  value.  Hence,  for 
purpose  of  the  act,  it  is  held  that  shares  of  stock  issued,  whether  with 
or  without  a  par  or  nominal  value,  are  "paid  up  capital  stock"  within 
meaning  of  law;  and  the  amount  to  be  set  forth  in  the  return  as  one  of 
the  determining  elements  in  computing  the  amount  of  interest  which  may 
be  allowably  deducted  is  the  amount  of  capital  actually  received  by  cor- 
poration and  for  which  shares  are  issued. 

In  case  of  shares  of  stock  issued  with  a  par  value  fully  paid  up  and 
non-assessable,  the  par  value  of  all  such  shares  so  issued  is  paid  up 
capital  tock  of  corporation. 

In  case  of  shares  of  stock  issued  without  par  value  the  amount  of 
capital  actually  received  and  for  which  such  shares  are  issued  is  paid  up 
capital  stock. 

And  in  the  case  of  capital  stock  issued  with  par  value,  so  in  the  case 
of  stock  issued  without  par  value,  the  amount  of  the  "paid  up  capital 
stock,"  for  the  purpose  of  this  act  should  not  be  increased  except  as  new 
capital  is  paid  in  and  for  which  additional  shares  are  issued.  In  cases 
wherein  snares  of  stock  are  issued  without  par  value,  such  stock  is 
obviously  common  stock.  If  it  should  occur  that  such  shares  are  issued 
as  bonuses  in  connection  with  shares  of  preferred  stock,  which  must 
have  a  par  or  nominal  value,  and  entire  capital  paid  in  is  represented  by 
entire  value  of  preferred  stock,  then  and  in  that  case  the  "paid  up  capital 
stock"  for  all  purposes  of  the  income  tax  law,  will  be  par  value  of  pre- 
ferred stock. 

If  both  common  and  preferred  stock  are  issued  for  a  cash  or  other 
equivalent  consideration,  the  "paid  up  capital  stocks"  within  meaning  of 


102  TREASURY  DECISIONS 

law  will  be  the  par  value  of  preferred  stock  plus  amount  actually  paid 
in  on  shares  issued  without  par  or  nominal  value. 

It  is  therefore  held  that  corporations  whose  shares  of  stock  are 
issued  without  par  value  has  a  "paid  up  capital  stock"  within  meaning 
of  law,  equal  to  the  amount  paid  up  in  for  such  stock,  and  it  will  be 
authorized  to  compute  its  interest  deduction  in  accordance  with  the  rules 
set  out  in  the  law  for  corporations  having  the  "paid  up  capital  stock" 
being  in  such  cases  the  actual  paid  in  capital  for  which  snares  are  issued. 
(Acting  Commissioner  G.  E.  Fletcher,  January  13th,  1916.) 

Cemetery  Companies:  Operated  exclusively  for  mutual  benefit  of 
members  are  exempt.  Cemetery  Companies  operating  for  profit  are  lia- 
ble to  tax.  (Art.  9,  Reg.  33.) 

Maturity  of  Coupons  Require  Certificate  of  Ownership:  A  certifi- 
cate of  ownership  should  be  filed  for  each  maturity  of  coupons.  (Deputy 
Commissioner  L.  F.  Speer,  December  7,  1914.) 

Endorsement  Not  Required,  on  Back  of  Certificates:  The  person 
first  receiving  coupons  or  interest  orders  for  collections  is  no  longer 
required  to  endorse  same,  as  provided  in  T.  D.  1887.  (Deputy  Commis- 
sioner L.  F.  Speer,  September  18,  1914.) 

Certificate,  Address  on:  Banks  should  exercise  care  in  securing  full 
post  office  address  on  certificates.  When  no  street  address  is  given,  this 
office  will  assume  it  not  necessary,  and  certificates  will  not  be  returned 
.for  correction. 

Certificates  Executed  by  Domestic  Corporations,  Exempt  Organiza- 
tions, etc.,  to  accompany  coupons  filed  with  debtor:  If  owners  of  bonds 
or  corporations,  stock  companies,  associations,  or  insurance  companies 
organized  in  the  United  States,  no  matter  how  created,  are  either  taxable 
or  exempt  from  taxation,  debtor  not  required  to  withhold  or  deduct  tax 
upon  income  derived  in  case  of  interest  on  registered  bonds,  provided 
coupons  from  such  bonds  shall  be  accompanied  by  certificates  of  owner- 
ship which  shall  be  filed  with  the  debtor  represented  for  payment. 

Said  certificate  should  be  made  on  revised  Form  1001,  signed  in  name 
of  organization  (stating  place  of  business),  by  some  principal  officer  of 
said  corporation,  duly  authorized  to  sign  same,  which  must  be  properly 
dated.  (Art.  45,  Reg.  33.) 

Debtor  Must  Obtain  Certificate  of  Ownership  or  Deduct  Tax: 
Ownership  certificates  must  be  obtained  by  the  debtor  corporations  and 
withholding  agents  in  all  cases  as  required  by  the  regulations.  (Letter 
No.  1242  to  collectors.) 

Tax  on  Domestic  Bonds,  etc.,  Will  Not  be  Deducted  if  Certificate  of 
Exemption  Filed:  Under  act  of  September  8,  1916,  no  tax  is  to  be  with- 
held at  source  from  income  of  non-resident  alien,  firms,  corporations, 
joint  stock  companies,  insurance  companies,  not  engaged  in  business  nor 
having  any  place  of  business  within  the  United  States. 

The  income  of  such  non-resident  alien  associations,  etc.,  subject  to 
withholding  provision  is  that  derived  from  interest  on  bonds,  mortgages, 
deeds  of  trust,  or  similar  obligations  of  domestic  or  resident  debtors, 
regardless  of  amount. 

Including  and  from  and  after  September  9,  1916,  and  to  and  includ- 
ing December  31,  1916,  normal  tax  should  be  withheld  from  such  income 
at  the  rate  of  one  per  cent  (1%)  on  amount  thereof.  Including  and  from 
and  after  January  1,  1917,  normal  income  tax  to  be  withheld  at  the  rate 
of  two  (2%)  per  cent. 

To  enable  debtors  to  distinguish  between  non-resident  alien  cor- 
porations, etc.,  which  have  no  place  of  business  within  the  United  States, 
and  those  that  have,  Form  1086  is  provided  for  this  purpose.  (T.  D. 
2374.) 

Ownership  Certificates  for  Non-Resident  Alien  Firms  to  be  Used 
With  Coupons  Detached  From  Bonds  of  Domestic  Corporations,  etc.: 
Certificate  1004  should  be  used  with  coupons  detached  from  bonds  or 
other  obligations  of  domestic  corporations  owned  by  non-resident  alien 
individuals  or  fiduciaries,  is  revised  to  include  firms  and  organizations, 


TREASURY  DECISIONS  103 

and  certificate  Form  1004,  revised  November  22,  1916,  is  provided  for 
use  of  non-resident  alien  individuals,  firms,  organizations,  etc.,  for  pur- 
pose of  declaring  ownership  of  bonds  of  domestic  organizations  and  to  be 
attached  to  interest  coupons  when  presented  for  payment.  (T.  D. 
2399.) 

Certificates  to  be  Executed:  By  foreign  exempt  organizations,  when 
presenting  for  payment  coupons  detached  from  bonds  issued  by  domestic 
corporations,  should  have  attached  thereonto  certificate  Form  1004,  re- 
vised, modified  to  show  corporate  ownership  and  stamped,  "exempt 
organization." 

Certificates  for  Which  Substitution  is  Made  to  be  Forwarded  to 
Washington  Each  Month:  Certificates  of  owners  for  which  collecting 
agency  certificates  are  substituted  must  be  forwarded  to  commissioner 
of  internal  revenue  at  Washington,  D.  C.,  by  collecting  agent  not  later 
than  the  20th  day  of  month  succeeding  that  in  which  cpupons  were  re- 
ceived for  collection.  (T.  D.  1903.) 

Certificates  of  Ownership  are  not  required  to  accompany  interest 
orders  or  checks  in  payments  of  interest  on  fully  registered  bonds  owned 
by  residents,  but  claim  for  exemption  must  be  filed  or  tax  will  be  de- 
ducted: Certificates  of  ownership  not  required  to  accompany  interest 
orders  on  payment  of  interest  on  fully  registered  bonds,  as  information 
as  to  ownership  of  bonds  will  be  furnished  by  debtor  organization  on 
monthly  list  returned,  Form  1012,  but  claims  for  exemption  must  be 
filed  with  debtor  or  tax  must  be  withheld.  (T.  D.  1974.) 

In  case  of  interest  payments  on  bonds  registered  as  to  both  principal 
and  interest,  debtors  shall  deduct  normal  tax  from  accruing  interest  on 
all  such  bonds  before  sending  orders  with  checks  to  owners,  unless  there 
shall  be  filed  with  said  debtor  T.  D.  1974  (or  fiscal  agent  through  whom 
said  interest  is  customarily  paid)  (Art.  41,  Reg.  33)  at  least  five  days 
before  due  date  of  said  interest,  not  later  than  30  days  prior  to  March 
1st.  (Art.  41,  Reg.  33.) 

The  prescribed  certificates  claiming  exemption,  T.  D.  1974,  from 
liability  for  said  taxes  as  herein  provided,  executed: 

(a)  By  a   citizen   or   resident   of   the   United   States,   the   bona-fide 
owner  of  registered  obligations,  who  may  claim  exemptions  under  Para- 
graph (C)  Section  (2)  of  income  tax  law. 

(b)  By  corporations,  joint  stock  companies,  associations,  or  insurance 
companies,  etc.,  organized  in  the  United   States,  which   are   taxable   or 
exempt  from  taxation  as  provided  in  Paragraph  (G)  Subdivision  (A)  of 
the  Act.     (Art.  41,  Reg.  33.) 

Certificates  Filed  by  Domestic  Owners  of  Record  Disclosing  Actual 
Ownership  to  Be  Filed  Monthly:  Debtor  corporations  governed  as 
to  withholding  by  facts  as  to  actual  ownership  disclosed  by  certificates. 
All  certificates  filed  with  debtor  corporation  for  the  purpose  of  dis- 
closing actual  ownership  of  stock  shall  be  forwarded  to  collector  of 
internal  revenues  for  its  district  on  or  before  the  20th  day  of  the  month 
next  succeeding  the  month  during  which  said  certificates  were  received. 
(T.  D.  2382.) 

Substitute  Certificates,  Entered  on  Monthly  List  Returns:  All  sub- 
stitute certificates  that  are  received  by  debtors  or  withholding  agents 
will  be  considered  same  as  certificates  of  owners,  and  in  entering  same 
in  making  monthly  returns,  debtors  or  withholding  agents  will  enter 
name  and  address  of  collecting  agent,  and  number  of  substitute  cer- 
tificates in  lieu  of  original  certificate  containing  name  and  address  of 
owners  of  bonds.  (Art.  51,  Reg.  33.) 

Certificates  Claiming  Full  Exemption  Need  Not  Be  Listed,  but  Must 
Be  Filed  With  Collector  at  Usual  Time:  Until  further  ruling  on  the 
subject,  no  list  return  is  required  to  be  made  of  certificates  of  ownership 
accompanying  coupons  filed  with  debtor  or  withholding  agent  when 
owners  of  bonds  are  not  subject  to  having  normal  tax  withheld  at  source, 
but  all  such  certificates  of  ownership  shall  be  forwarded  by  debtor  or 


104  TREASURY  DECISIONS 

witholding  agent  to  Collector  of  Internal  Revenue  for  the  district  on 
or  before  the  20th  day  of  month  succeeding  that  in  which  said  certifi- 
cates of  ownership  were  received.  (Art.  56,  Reg.  33.) 

Certificates  of  ownership  in  which  exemption  claimed  to  extent  of 
amount  of  payments  need  not  be 'listed,  and  if  only  this  class  of  cer- 
tificates are  received  during  the  preceding  month,  no  return  is  required. 
However,  such  certificates  should  be  forwarded  to  the  proper  Collector 
of  Internal  Revenue  with  a  letter  of  transmittal.  (T.  D.  2135.) 

Fiduciaries  Having  Control  of  More  Than  One  Estate  or  Trust: 
Wherever  fiduciaries  have  custody  and  control  of  more  than  one  estate 
or  trusts  having  assets  of  bonds  of  corporations,  etc.,  of  the  same 
issue,  they  may  adopt  certificate  Form  1015  and  1019,  revised,  by  chang- 
ing the  words  "Estate  or  trusts"  in  lines  one,  two  and  three  of  said  form 
to  the  plural. 

In  such  cases,  notation  should  be  made  on  back  of  certificate  show- 
ing each  estate  or  trust: 

(a)  Name  of  the  Estate  or  Trust,  (b)  Amount  of  Bonds,  (c) 
Amount  of  Interest.  (T.  D.  1987.) 

Ownership  Certificates  To  Be  Used  by  Non-Resident  Alien  Fidu- 
ciaries. Form  1004,  revised,  is  provided  for  the  use  of  non-resident 
alien  individuals,  firms,  organizations  and  fiduciaries,  for  the  purpose 
of  declaring  ownership  of  bonds  of  domestic  corporations,  etc.,  and  to  be 
attached  to  interest  coupons  detached  from  such  bonds  when  presenting 
for  payment.  (T.  D.  2399.) 

Alien  Non-Resident  Partnerships  to  File  Ownership  Certificates: 
Form  1040,  Revised,  November  22nd,  1916,  is  provided  for  use  of  non- 
resident alien  organizations  for  the  purpose  of  declaring  ownership  of 
bonds  of  domestic  corporations,  etc.,  and  to  be  attached  to  interest 
coupons  detached  from  such  bonds  when  making  presentation  for  pay- 
ment. (T.  D.  2329.) 

Partnerships,  Foreign,  Having  Place  of  Business  in  the  United 
States,  Must  File  Certificate  of  Ownership  to  Prevent  Deduction  at 
Source  on  Interest  on  Corporate  Bonds,  Etc.:  To  claim  exemption  from 
withholding  of  the  normal  tax  at  the  source  on  their  income  from 
sources  within  the  United  States  a  certificate  (Form  1086)  must  be 
filed.  Until  such  certificate  shall  be  printed,  certificates  101,  Revised, 
and  1063  should  be  used. 

Scrip:  Scrip  certificates  issued  by  a  corporation  to  its  stockholders 
in  lieu  of  dividends  bearing  interest  and  redeemable  at  a  specified  time 
not  longer  than  one  year  from  date  of  issue,  are  not  corporate  obliga- 
tions similar  to  bonds,  mortgages,  bonds,  mortgages,  etc.,  and  not  sub- 
ject to  withholding  except  when  amount  payable  to  an  individual  exceeds 
$3,000  in  any  calendar  year.  Payment  in  scrip  equivalent  to  cash. 
(T.  D.  2090,  as  amended  by  T.  D.  2152.) 

Investment  Certificates:  Issued  by  corporation  for  term  of  years 
are  corporate  obligations  within  meaning  of  income  tax  law.  (T.  D. 
2090.) 

Return  Certificates  Are  to  Be  Filed:  When  withholding  agent  is 
authorized  by  debtor  corporation,  he  may  file  with  collector  of  his  dis- 
trict required  returns  and  certificates,  in  which  case  assessment  of  tax 
withheld  by  him  will  be  made  in  that  district.  If  no  authority  be  given, 
such  reports,  etc.,  will  be  furnished  by  debtor  corporation  to  collector 
of  its  district,  where  in  such  case  assessment  will  be  made.  (Art.  38, 
Reg.  33.) 

Ownership  Certificates:  For  the  purpose  of  collecting  tax,  the 
source  shall  be  withholding  agent,  and  paying  agent  in  the  United 
Stales,  who  shall  deduct  same,  and  withhold,  and  no  other  bank,  trust 
company,  etc.,  taking  coupons  of  interest  orders  for  collection  shall  with- 
hold tax  thereon  where  such  coupons  are  accompanied  by  certificates  of 


TREASURY  DECISIONS  105 

ownership  signed  by  owners  of  bonds,  upon  which  interest  had  matured. 
(Art.  39,  Reg.  33.) 

Certificates  of  Ownership  Not  Filed,  First  Bank,  Etc.,  Receiving 
Coupons  for  Collection,  Deducts  Tax,  Using  Its  Own  Certificate:  Where 
coupons  or  interest  orders  are  not  accompanied  by  certificates,  as  here- 
tofore prescribed,  collecting  agency  receiving  the  coupons  for  collection 
or  otherwise  shall  deduct  and  withhold  tax,  and  shall  attach  to  coupons 
its  own  certificate,  revised  Form  1002,  giving  name  and  address  of 
owner  or  person  presenting  such  coupon  if  owner  is  not  known,  with  a 
description  of  the  coupons  or  interest  orders;  also  setting  forth  that  they 
are  withholding  tax  upon  you.  (Art.  52,  Reg.  33.) 

Limitation  on  Claims  for  Refunding:  "All  claims  for  the  refunding 
of  any  internal  tax  alleged  to  have  been  erroneously  or  illegally  assessed 
or  collected,  or  of  any  penalty  alleged  to  have  been  collected  without 
authority,  or  of  any  sum  alleged  to  have  been  accepted  or  in  any  manner 
•vrongfully  collected,  must  be  presented  to  the  Commissioner  of  In- 
ternal Revenue  within  two  years  next  after  the  cause  of  action  accrued: 
Provided,  that  claims  which  accrued  prior  to  June  6,  1872,  may  be  pre- 
sented to  the  Commissioner  at  any  time  within  one  year  from  the  said 
date.  But  nothing  in  this  section  shall  be  construed  to  revive  any 
right  of  action  which  was  already  barred  by  any  statute  on  that  date." 
(Section  3228,  Rev.  St.)  See  Mail  &  Newspaper  Transportation  Company 
et  al.  v.  Anderson,  Collector,  234  Federal  590,  April  11,  1916. 

Defendant  in  Suit  to  Recover  Back  Taxes:  A  suit  to  recover  back 
taxes  cannot  be  maintained  against  a  successor  to  the  collector  to 
whom  the  taxes  were  paid,  except  in  his  individual  capacity.  The 
remedy  lies  either  in  an  action  against  the  collector  who  actually  re- 
ceived the  taxes  or  in  an  action  against  the  United  States.  (Duncan  I. 
Roberts  v.  John  Z.  Lowe,  Jr.,  Collector  for  the  Southern  District  of 
New  York.  Rendered  in  U.  S.  District  Court  for  Southern  District  of 
N.  Y.,  November  14,  1916.)  (T.  D.  2394.) 

Statute  of  Limitations,  Bar  Removed  From  Certain  Claims  for 
Refund:  This  office  is  of  the  opinion  that  claims  can  now  be  made  for 
refund  under  Section  14  P.  A.,  Act  of  September  8,  1916,  which  have 
once  been  rejected  by  the  Commissioner  because  of  the  statute  of  limi- 
tation in  existence  at  the  time.  Claims  rejected  can  also  be  reopened 
if  the  question  involves  an  examination  of  the  return.  The  power  does 
not  extend  to  other  claims  whose  adjustment  does  not  necessitate  an 
examination  of  the  return.  (T.  D.  2396.) 

Social  Clubs:  Operated  for  pleasure  and  other  non-profitable  pur- 
poses, having  no  net  income  inuring  to  benefit  of  any  individual,  are  ex- 
empt from  requirements  of  Federal  Income  Tax  Law. 

Club  May  Register  as  an  Exempt  Organization:  All  clubs  are  not 
exempt  from  provisions  of  income  tax  law,  even  though  not  operated 
for  profit.  A  Club  desiring  to  register  as  an  exempt  organization  should 
file  with  Commissioner  of  Internal  Revenue  a  copy  of  its  charter,  or 
affidavit  by  its  Officers  setting  forth  its  nature,  so  that  determination 
can  be  made  whether  it  is  exempt  under  provisions  of  Paragraph  G  of 
Income  Tax  Law.  (T.  D.  2090.) 

Interest  on  Collateral  Subject  to  Sale  or  Hypothecation  in  Business: 
Interest  paid  on  indebtedness,  wholly  secured  by  collateral,  the  subject 
of  sale  in  ordinary  business  of  such  corporation,  is  deductible  to  the 
full  amount  of  such  interest  paid.  This  contemplates  that  entire  inter- 
est received  on  collateral  securing  such  indebtedness  shall  be  included 
in  gross  income  returns.  (Art.  150,  Reg.  33.) 

Shares  Without  Par  Value;  Computation  of  Deductible  Interest  on 
Indebtedness:  In  case  of  shares  of  stock  issued  without  par  value,  the 
amount  of  capital  actually  received  and  for  which  such  shares  are  issued 
is  the  paid-up  capital  stock. 

Hence  it  follows  that  the  interest  which  a  corporation  whose  stock 


106  TREASURY  DECISIONS 

is  issued  without  par  value  may  allowably  deduct  from  gross  income 
amount  of  interest  actually  paid  within  the  year  on  an  amount  of  bonded 
or  other  indebtedness  not  in  excess  of  the  sum  of  one-half  of  interest- 
bearing  indebtedness  outstanding  at  the  close  of  the  year,  plus  the 
entire  amount  of  the  paid-up  capital  stock — that  is,  the  amount  of  capital 
paid  up  and  represented  by  the  shares  issued.  And  in  the  case  of  capital 
stock  issued  with  par  value,  so  in  the  case  of  stock  issued  without  par 
value,  the  amount  of  "paid-up  capital  stock,"  for  the  purpose  of  the  act, 
cannot  be  increased  except  as  new  capital  paid  in  and  for  which  addi- 
tional shares  are  issued. 

In  cases  wherein  shares  of  stock  are  issued  without  par  value,  such 
stock  is  obviously  common  stock. 

If  it  should  occur  that  such  shares  are  issued  as  a  bonus,  in  connec- 
tion with  shares  of  preferred  stock,  which  latter  must  necessarily  have 
a  par  or  nominal  value,  and  the  entire  capital  paid  in  represented  by  par 
value  preferred  stock,  and  in  that  case  "paid-up  capital  stock,"  for  all 
the  purposes  of  the  income  tax  law  will  be  par  value  of  preferred  stock. 

If  both  common  and  preferred  stock  are  issued  for  cash  or  other 
equivalent  consideration,  the  "paid-up  capital  stock,"  within  meaning  of 
law,  will  be  par  value  of  preferred  stock  plus  amount  actually  paid  in  on 
shares  issued  without  par  or  nominal  value. 

It  is,  therefore,  held  that  a  corporation  whose  shares  of  stock  are 
issued  without  par  value  has  a  "paid-up  capital  stock"  within  the  mean- 
ing of  the  law  equal  to  the  amount  paid  in  for  such  stock,  and  will  be 
authorized  to  compute  its  interest  deduction  in  accordance  with  the  rules 
set  out  in  law  for  corporations  having  a  paid-up  capital  stock,  being 
actually  paid-in  capital  for  which  shares  are  issued.  (Commissioner  J. 
D.  Fletcher,  dated  January  13,  1916.) 

Collateral  the  subject  of  sale,  refers  to  physical  or  tangible  property 
bound  for  the  performance  of  certain  covenants  or  payment  of  certain 
obligations,  and  which  physical  or  tangible  property  is  the  "subject  of 
sale  in  the  ordinary  business  of  the  corporation"  owning  the  same. 
Where  such  corporation  is,  as  a  matter  of  its  ordinary  business,  engaged 
in  buying  and  selling,  or  dealing  in  such  property,  the  interest  actually 
paid  within  the  year  on  indebtedness,  wholly  secured  by  such  collateral 
may  be  allowably  deducted  from  gross  income  as  an  expense  of  doing 
business  without  regard  to  the  limit  of  deductible  interest  as  otherwise 
provided  by  statute.  The  corporation,  etc.,  must  be  organized  and  oper- 
ated for  the  purpose  of  buying  and  selling  and  dealing  in  the  particular 
kind  of  property  which  becomes  the  collateral  in  question,  and  the  par- 
ticular property  pledged  for  the  debt  upon  which  interest  is  paid  must 
be  the  "subject  of  sale  in  the  ordinary  business  of  the  corporation."  Real 
estate  mortgaged,  and  property  of  corporations  organized  for  and  en- 
gaged in  the  business  of  buying,  selling  and  dealing  in  real  estate;  ware- 
house receipts  representing  property  the  subject  of  sale  in  the  ordinary 
business  of  the  corporation  owning  the  same,  and  which  warehouse 
receipts  are  pledged  as  collateral  for  such  corporation's  debts  are  exam- 
ples where  the  interest  paid  will  be  deductible  as  a  "business  expense" 
and  not  subject  to  the  statutory  limitations  as  to  interest  deductions.  (T. 
D.  2090.) 

Limitation:  No  Three- Year  Limitation  to  Right  of  Gov- 
ernment to  Collect  Taxes  by  Suit  or  Otherwise:  United  States  vs.  Grand 
Rapids  &  Indiana  Railway — U.  S.  Dist.  Court,  Western  District  of  Michi- 
gan, February  25th,  1915:  In  this  case  the  court  held  that  the  three- 
year  clause  of  special  excise  tax  law  is  not  a  limitation  upon  the  right 
of  the  Government  to  sue  for  unpaid  taxes,  but,  at  most,  is  a  limitation 
of  the  right  of  collecting  officers  to  make  assessments  and  enforce  pay- 
ment by  ordinary  summary  statutory  proceedings. 

It  follows,  therefore,  that  when  additional  tax  is  found  to  be  due 
for  a  period  antedating  the  three-year  limit,  an  assessment  is  not  a  neces- 


TREASURY  DECISIONS  107 

sary  condition  precedent  to  collect  the  tax,  as  the  amount  of  tax  may 
be  collected  by  suit. 

Waiver  of  Three- Year  Limitation:  While  the  Government  is  fully 
authorized  to  recover  such  taxes  by  suit,  this  office  prefers  that  collec- 
tions should  be  made  in  ordinary  statutory  methods,  that  is  as  a  result 
of  formal  assessment.  In  order  that  this  may  be  done,  corporations 
should  be  requested  to  make  amended  returns,  or  to  execute  waivers  in 
such  form  as  to  waive  the  three-year  statutory  limitations  as  to  time 
within  which  assessment  may  be  made,  and  the  corporation  should  be 
informed  that,  in  executing  this  waiver,  they  forfeit  none  of  their  rights 
under  the  law  or  assume  liability  to  no  penalty  that  might  not  be  en- 
forced against  them  in  the  absence  of  such  waiver.  The  corporation 
should  also  be  given  to  understand  that  execution  of  the  waiver  is,  in 
fact,  to  their  advantage,  in  that  it  has  the  effect  to  eliminate  the  neces- 
sity, on  the  part  of  the  Government,  to  recover  taxes  paid  by  suit.  If 
however,  the  corporation  against  which  additional  tax  liability  is  dis- 
covered, will  formally  accept  finding  of  the  examining  officer  and  agree 
voluntarily  to  pay  to  collector  of  internal  revenue  amount  of  tax  found 
to  be  due,  amended  returns  or  waivers  need  not  be  required.  (Letter 
No.  1192  to  Collectors.) 

Taxes  Wrongfully  Collected,  Suits  for  Recovery:  "No  suit  shall  be 
maintained  in  any  court  for  the  recovery  of  any  internal  tax  alleged 
to  have  been  erroneously  or  illegally  collected,  or  of  any  sum  alleged  to 
have  been  excessive  or  in  any  manner  wrongfully  collected,  or  of  any 
penalty  claimed  to  have  been  collected  without  authority,  or  of  any 
sum  alleged  to  have  been  excessive  or  in  any  manner  wrongfully  col- 
lected, until  appeal  shall  have  been  duly  made  to  Commissioner  of 
Internal  Revenue,  according  to  provisions  of  law  in  that  regard,  and 
the  regulations  of  the  Secretary  of  the  Treasury  established  in  pur- 
suance thereof,  and  a  decision  of  the  Commissioner  has  been  had 
therein:  Provided,  that  if  such  decision  is  delayed  more  than  six 
months  from  the  date  of  such  appeal,  then  the  said  suit  may  be  brought 
without  first  having  a  decision  of  the  Commissioner  at  any  time  within 
date  shall  be  revived  by  this  section."  (Sec.  3227,  Rev.  St.) 

Taxes,  Limitation  as  to  Suits  of  Wrongfully  Collected:  "No  suit  or 
proceeding  for  recovery  of  any  internal  tax  alleged  to  have  been 
erroneously  or  illegally  assessed  or  collected,  or  of  any  penalty  alleged 
to  have  been  collected  without  authority,  or  of  any  sum  alleged  to  have 
been  excessive,  or  in  any  manner  wrongfully  collected,  shall  be  main- 
tained in  any  court  unless  the  same  is  brought  within  two  years  next 
after  the  cause  of  action  accrued:  Provided,  that  actions  for  such 
claims  accrued  prior  to  June  6,  1872,  may  be  brought  within  one  year 
from  said  date;  and  that  where  any  such  claim  was  pending  before  the 
commissioner,  as  provided  in  the  preceding  section,  an  action  thereon 
may  be  brought  within  one  year  after  such  decision  and  not  later.  But 
no  right  of  action  which  was  already  barred  by  any  statute  on  the  said 
date  shall  be  revived  by  this  section."  (Sec.  3227,  Revised  Statutes.) 

Commissions  are  properly  deductible  from  corpus  of  estate,  they 
should  not  be  included  in  fiduciary  return  on  Form  1041,  revised,  as 
allowable  deductions  against  interest  of  beneficiaries.  If  on  the  other 
hand  commissions  should  be  deducted  from  income  of  estate  distrib- 
utable among  beneficiaries  amount  should  be  entered  on  Form  1041 
(revised),  legitimate  and  necessary  expense  deductible  from  income  of 
estate. 

Salaries,  Commissions  and  Profit  Sharing:  Commissions  paid  sales- 
men are  income  and  should  be  accounted  for  in  return,  when  indefinite, 
as  to  time  of  accrual  not  subject  to  withholding.  (T.  D.  2090.) 

Salaries  paid  on  a  straight  basis  for  services  at  source.  If,  however, 
to  pay  therefrom  his  own  travel  or  legitimate  expenses  incident  to  busi- 
ness of  his  employment,  the  income  accruing  to  him  is  not  subject  to 
withholding,  the  amount  not  being  fixed  or  determinable.  (T.  D.  2135.) 


108  TREASURY  DECISIONS 

A  person  receiving  a  salary  in  excess  of  $4,000  and  in  addition  a 
commission  of  1  per  cent  on  all  sales,  exact  amount  due  on  account  of 
commissions  not  being  determinable  until  February  of  following  year 
in  which  commissions  were  earned,  at  which  time  both  his  salary  and 
commission  are  paid  to  him  for  preceding  year,  should  return  such 
income  in  the  year  in  which  such  payment  is  made. 

Where  employee  is  paid  a  two  years'  salary  on  condition  that  he 
surrender  contract  of  employment,  such  sum  should  be  reported  in 
return,  and  if  sum  exceeds  $3,000,  normal  tax  should  be  deducted  and 
withheld  therefrom,  subject  to  authorized  exemption  claimed.  (T.  D. 
2090.) 

Where  a  part  of  compensation  is  in  form  of  salary  payable  monthly, 
and  part  in  form  of  bonus  and  not  determined  on  or  after  January  1st, 
of  the  year  following  in  which  services  were  rendered,  two  parts  of 
any  one  year's  compensation  cannot  be  considered  together  for  the 
purpose  of  withholding  tax  in  making  returns;  but  the  fixed  salary  of 
one  year  should  be  considered  with  the  bonus  received  on  or  after 
January  1st,  of  that  year.  (T.  D.  2135.) 

Salaries  paid  on  a  straight  basis  for  services  at  source.  If,  how- 
ever, per  diem  salary  is  paid  and  employee  is  required  by  terms  of 
employment  to  pay  therefrom  his  own  travel  and  legitimate  expenses 
incident  to  business  of  his  employment,  the  income  accruing  to  him  is 
not  subject  to  withholding,  the  amount  not  being  fixed  or  determinable. 
(T.  D.  2135.) 

Commissions  Paid  Salesmen  in  Relation  to  Withholding  Its  Source: 
Where  an  individual  works  on  a  straight  commission  basis  and  in 
the  earning  of  his  commissions  incurs,  and  personally  pays  traveling 
and  other  necessary  expenses,  such  as  show-rooms,  hire  of  sub-agents, 
or  additional  help,  etc.,  the  amount  paid  to  him  as  commissions  are 
not  subject  to  withholding  of  normal  tax  at  the  source  as  such  amounts 
do  not  represent  net  incomes. 

The  amount  paid  to  an  individual  working  on  a  commission  basis 
who  incurs  and  pays  no  necessary  business  expenses  in  the  earning 
of  his  commission  is  held  to  be  net  income,  and  as  such,  is  subject  to 
withholding  of  the  normal  tax  at  the  source  if  the  aggregate  amount 
paid  during  any  one  year  exceeds  $3,000  unless  the  certificate  claim- 
ing exemption  is  filed,  and  then  only  upon  the  amount  paid  in  excess 
of  the  exemption  claimed.  (L.  F.  Speer,  January  12th,  1917.) 

Income  of  Contracting  Companies:  In  the  case  of  a  large  con- 
tracting company,  having  numerous  uncompleted  contracts  which  run 
for  periods  of  several  years,  there  does  not  appear  to  be  any  objec- 
tion to  such  corporation  preparing  its  return  in  such  manner  that  its 
gross  income  will  be  arrived  on  basis  of  completed  work,  that  is,  on 
jobs  finally  completed  and  payments  made  during  year  in  which  return 
is  made.  If  gross  income  is  arrived  at  in  this  method,  deductions  from 
gross  income  should  be  limited  to  expenditures  made  on  account  of  such 
completed  contracts  (T.  D.  2161.) 

Steamship  Companies  Foreign:  Expenses  of:  General  expenses, 
such  as  coal,  ship  stores,  etc.,  of  foreign  steamship  companies  shall  be 
prorated  as  provided  in  the  act  for  interest  deductions  in  case  of  foreign 
corporations.  (Art.  116,  Reg.  33.) 

Compromises:  The  Commissioner  of  Internal  Revenue,  with  the 
advice  and  consent  of  the  Secretary  of  the  Treasury,  may  compromise 
any  civil  or  criminal  case  arising  under  the  Internal  Revenue  Laws 
instead  of  commencing  suit  thereon;  and,  with  the  advice  and  consent 
of  the  Secretary  and  recommendation  of  the  Attorney-General,  he  may 
compromise  any  such  case  after  suit  thereon  has  been  commenced. 
Whenever  a  compromise  is  made  in  any  case  there  shall  be  placed  on 
file  in  the  office  of  the  commissioner,  the  opinion  of  the  solicitor  of 
internal  revenue,  or  of  the  officer  acting  as  such  with  his  reasons  there- 
for, with  a  statement  of  the  amount  of  tax  assessed,  the  amount  of 


TREASURY  DECISIONS  109 

additional  tax  or  penalty  imposed  by  law  in  consequence  of  neglect 
or  delinquency  of  person  against  whom  the  tax  is  assessed  and  the 
amount  actually  paid  in  accordance  with  the  terms  of  the  compromise 
(Sec.  2239,  Rev.  St.) 

Corporations — Constitutionality  of  Act  of  October  3rd,  1913,  Was 
Attacked  on  Ground  of  Alleged  Retroactive  Features:  The  Supreme 
Court  upheld  the  constitutionality  of  the  act. 

Constitutionality:  of  the  Act  of  October  3rd,  1913,  was  atacked  be- 
cause of  its  discriminating  features  in  exempting  certain  classes  of  cor- 
porations. The  Supreme  Court  upheld  the  constitutionality  of  the  Act. 

Constitutionality  of  the  Act  of  October  3rd,  1913.  Brushaber  vs. 
Union  Pacific  Railroad  Co.  240  U.  S.  1.  (January  24th,  1916.) 

As  a  stockholder  of  Union  Pacific  Railroad  Company,  appellant  filed 
a  bill  to  enjoin  the  corporation  from  complying  with  the  income  tax 
provision  of  act  of  October  3rd,  1913. 

The  contentions  of  the  appellant  were  that  this  part  of  the  statute 
were  repugnant  with  the  5th  and  6th  amendment  to  the  constitution. 

Court  held  that  as  far  as  the  retroactiveness  of  the  statute  was  con- 
cerned, that  question  was  closed,  for  in  Stockdale  vs.  Insurance  Com- 
panies, 20  Wall  323,  in  sustaining  a  provision  in  a  prior  income  tax  law 
which  was  assailed  because  of  its  retroactive  character,  it  was  said: 

"The  right  of  Congress  to  have  imposed  this  tax  by  new  statute, 
although  the  measure  of  it  was  governed  by  the  income  of  the  past  year, 
could  not  be  doubted,  much  less  can  it  be  doubted  that  it  could  impose 
such  a  tax  upon  the  income  of  the  current  year,  though  part  of  that  year 
had  elapsed  when  the  statute  was  passed.  The  joint  resolution  of  1864 
imposed  a  tax  of  5  per  cent  upon  all  income  of  the  previous  year, 
although  no  one  tax  on  it  had  already  been  paid,  and  no  one  doubted  the 
validity  of  the  tax  or  attempted  to  resist  it." 

(2nd)  The  appellant's  next  principal  contention  was  it  was  uncon- 
stitutional because  the  act  exempted  organizations  such  as  labor,  agri- 
cultural, or  horticultural  associations,  mutual  savings  banks,  etc.;  the 
argument  being  that  as  the  amendment  authorizes  a  tax  on  incomes, 
"from  whatever  source  derived,"  by  implication,  it  executed  the  powers 
to  make  these  exemptions,  but  this  is  only  a  form  of  expressing  the 
erroneous  contention  as  to  the  meaning  of  the  amendment  which  has 
been  disposed  of. 

The  court  concluded,  after  considering  the  various  minor  conten- 
tions, by  saying,  "In  fact,  comprehensively,  all  contentions  relied  upon, 
aside  from  the  erroneous  construction  of  the  amendment,  which  we  have 
previously  disposed  of,  we  cannot  escape  the  conclusion  that  they  all 
rest  upon  the  mistaken  theory,  that  although  there  be  differences  between 
the  subject  tax  to  differently  tax  them  transcend  the  limits  of  taxation 
and  amounts  to  a  want  of  due  process,  and  that  where  tax  levied  is 
believed  by  one  who  resists  its  enforcement  to  be  wanting  in  wisdom 
and  to  operate  injustice,  from  that  fact,  in  the  nature  of  things,  there 
arises  a  want  of  due  process  of  law  and  a  resulting  authority  in  the 
judiciary  to  exceed  its  powers,  and  to  correct  what  is  assumed  to  be 
mistaken  or  unwise  observance  by  the  legislative  authority  of  its  lawful 
powers,  even  although  there  be  no  semblance  of  warrant  in  the  consti- 
tution for  so  doing.  Affirmed. 

Surplus,  Undivided,  Corporations:  Individuals  are  subject  to  the 
additional  tax  on  incomes  derived  from  gains  and  profits  of  cor- 
porations whether  distributed  or  not:  Sub-division  2,  of  paragraph  a, 
Income  Tax  Law  of  October  3rd,  1913,  imposes  no  duty  on  the  taxpayer 
to  ascertain  the  distributive  interest  in  the  undivided  surplus  of  cor- 
porations for  the  purpose  of  making  return  of  the  amount  in  addition 
to  the  amount  of  dividends  declared  on  the  stock,  unless  the  Secretary 
of  the  Treasury  has  certified  that  in  his  opinion,  such  accumulation  is 
unreasonable  for  the  purpose  of  the  business.  (T.  D.  2135.) 

Income    Defined,    Corporation    Stock     Dividends    paid     from     net 


110  TREASURY  DECISIONS 

earnings  or  of  surplus  undivided  profits  of  corporations,  joint  stock 
companies  or  associations,  insurance  companies,  are  held  to  be  equivalent 
of  cash  and  constitute  taxable  income,  under  the  same  conditions  as  cash 
dividends.  (T.  D.  2274.) 

Stock  Dividends,  Calculation  of  "Cash  Value":  The  cash  value 
of  stock  dividends  paid  from  the  net  earnings  and  established 
surplus  or  undivided  profits  of  a  corporation  is  determined  by  the 
amount  of  earnings,  profit  or  surplus  distributed,  and  that  the  valuation 
at  which  the  stock  is  distributed  in  payment  of  the  dividend  the  terms 
amount  to  be  included  in  the  recipient's  personal  return.  That  is  in 
the  case  where  a  corporation  issues  one  thousand  shares  of  stock,  par 
value  of  $100,  and  distributes  500  additional  shares  in  payment  of  a 
dividend  declared  from  net  earnings,  profits  or  surplus  amounting  to 
$50,000,  one  holding  ten  shares  of  the  original  stock  and  receives  five 
shares  of  the  new  stock  as  his  pro  rata  share  of  the  dividends,  should, 
on  account  of  their  receipt,  include  $500  in  his  personal  return. 

Partnerships  (Limited),  Held  to  Be  Corporations,  and  in  their  organ- 
ized capacity  are  subject  to  income  tax  as  corporations.  (Art.  886, 
Reg.  33.) 

Partnerships,  limited,  held  to  be  associations  within  the  meaning 
of  the  income  tax  law  will  use  Form  1031  in  making  their  returns. 
(T.  D.  2137.) 

Promissory  Notes  of  Corporations:  Promissory  note  not  exceed- 
ing one  year  in  time  is  not  similar  to  bonds,  mortgages,  etc.,  and  not 
subject  to  withholding  except  when  amount  of  interest  to  any  one 
individual  exceeds  $3,000,  or  when  interest  thereon  is  payable  to  non- 
resident alien,  in  which  case  tax  should  be  withheld  regardless  of  amount 
of  payment.  (T.  D.  2090.) 

Corporations,  Obligations  of  Defined:  Corporate  obligations  simi- 
lar to  bonds,  mortgages,  deeds  of  trusts,  etc.,  for  income  tax  purposes, 
held  to  be  those  obligations  which,  though  not  bond  mortgages  or 
deeds  of  trusts,  are  similar  in  form  in  being  extended  beyond  time  of 
ordinary  commercial  paper.  Interest  payments  on  ordinary  commer- 
cial paper  payable  to  individuals  subject  to  withholding  at  source  only 
when  payment  to  any  one  individual  exceeds  $3,000  within  taxable  year. 
On  all  other  obligations  payable  to  individuals  payments  are  subject  to 
withholding  regardless  of  amount.  (T.  D.  2090.) 

Foreign  Corporations  Not  Having  Place  of  Business  in  the  United 
States  or  Doing  Business  Therein:  When  record  owner  of  domestic 
corporate  stock  is  non-resident  alien,  corporation,  etc.,  not  having  any 
place  of  business  or  engaged  in  business  in  the  United  States,  debtor  cor- 
poration will  withhold  normal  tax  and  pay  same  to  authorized  collector. 

Term  "Corporations"  as  used  above  covers  corporations,  joint  stock 
companies,  associations,  and  insurance  companies.  The  term  "non-resi- 
dent alien  corporations"  covers  all  corporations,  joint  stock  companies, 
or  associations  and  insurance  companies  organized,  authorized  or  existing 
under  laws  of  foreign  country,  having  no  place  of  business  in  the  United 
States;  the  term  "resident  alien  corporations,"  such  foreign  organizations 
as  have  office  or  place  of  business  in  the  United  States.  (T.  D.  2401.) 

Exemptions,  Method  of  Claiming  by  Corporations,  Etc.:  If  such 
items  are  presented  by  corporations,  joint-stock  companies  or  associa- 
tions and  insurance  companies,  organized  in  the  United  States,  the  for- 
mer certificate  heretofore  prescribed  for  such  organizations,  (Form  1001) 
shall  be  used  and  in  such  instances  no  tax  shall  be  deducted.  (Art.  60 
Reg.  33.) 

Corporation  Defined.  "Corporations"  or  "Corporation"  as  used  in 
these  regulations,  shall  be  construed  to  include  all  corporations,  joint- 
stock  companies  or  associations,  and  all  insurance  companies  coming 
within  the  terms  of  law,  and  all  such  other  organizations  hereinafter  re- 
ferred to  as  "corporations."  (Art.  78  Reg.  33.) 


TREASURY  DECISIONS  111 

It  is  immaterial  how  corporations  are  created  or  organized.  The 
terms  "joint-stock  companies,"  or  "associations"  shall  include  asso- 
ciates, real  estate  trusts,  or  by  whatever  name  known,  which  carry  on 
or  do  business  in  an  organized  capacity,  whether  organized  under,  and 
pursuant  to  state  laws,  trust  agreement,  declaration  of  trust,  or  other- 
wise, the  income  of  which  is  distributed  or  distributable  among  the 
members  or  shareholders  on  basis  of  capital  stock  which  they  hold,  or 
where  there  is  no  capital  stock,  on  basis  of  proportionate  share  of  capi- 
tal which  each  has  invested  in  business  or  property  or  organization, 
all  of  which  joint  stock  companies  or  associations,  shall  in  their  organ- 
ized capacity  be  subject  to  tax  imposed  by  this  act.  (Art.  79  Reg.  33.) 

Corporation  Unless  Specifically  Exempt  Shall  File  a  Return:  Every 
corporation  not  specifically  exempt  shall  make  return  of  annual  net 
income  required  by  law,  whether  it  have  income  liable  to  tax  or  not,  or 
whether  it  shall  be  subordinate  or  controlled  by  another  corporation. 
(Art.  80  Reg.  33.) 

Tax  imposed  by  income  tax  law  is  not  imposed  only  on  corpora- 
tions organized  and  operated  for  profit.  Any  corporation,  no  matter 
how  created,  organized,  or  what  its  purpose  may  be,  unless  it  comes 
in  class  of  organizations  specifically  enumerated,  will  be  required  to 
make  return  of  annual  income. 

It  is  therefore  held  that  commercial  men's  associations  and  like  or- 
ganizations come  within  the  requirements  of  law.  (T.  D.  2152.) 

Corporation  Subsidiaries:  Under  provisions  of  Income  Tax  Law, 
every  corporation,  regardless  of  its  relation  to  other  corporations  is  held 
to  be  a  distinct  and  separate  entity.  (T.  D.  2137.) 

In  case  of  parent  corporation  owning  practically  all  the  stock  of 
subsidiary  company,  it  is  held  each  is  a  distinct  entity  and  each  must 
return  a  separate  return  and  pay  tax  upon  income  as  shown  by  return. 

It  is  not  sufficient  for  purpose  of  income  tax  law  that  parent  com- 
pany report  gross  income  of  subsidiaries  and  deduct  from  such  gross 
income  expenses  of  such  subsidiaries.  Net  earnings  turned  over  by  sub- 
sidiary to  parent  company  are  dividends  within  the  meaning  of  the  law, 
and  as  such  dividends  are  not  deductible  from  gross  income,  parent 
company  must  pay  income  tax  on  its  net  income  notwithstanding  the 
fact  that  earnings  out  of  which  dividends  have  been  paid  has  been  sub- 
ject to  tax  as  against  subsidiary  company.  (T.  D.  2137.) 

Corporations  maintained  for  the  purpose  of  protecting  brands,  trade 
marks  and  trade  names  are  subject  to  return. 

If  such  subsidiary  companies  have  no  income,  earnings  or  expenses 
of  operation,  and  earnings  accrue  directly  to  parent  company,  that 
fact  must  be  clearly  set  out  in  return  of  subsidiary. 

If,  however,  subsidiary  concerns  are  mere  partnership  or  branches 
of  parent  company  and  not  incorporated  organizations,  then  no  re- 
turn need  be  filed.  The  parent  company  must  include  in  their  return 
earnings  and  expenses  of  such  branch.  (T.  D.  2161.) 

If  subsidiary  company  of  any  parent  corporation  making  a  return 
in  any  particular  district  have  principal  place  of  business  in  same  dis- 
trict, collector  of  that  district  should  list  such  corporations  in  his  Form 
632. 

If  subsidiary  companies  keep  separate  books  of  account  and  have 
principal  accounting  office  in  other  districts,  return  of  such  corpora- 
tions will  be  made  to  Internal  Revenue  Collector  for  district  in  which 
they  have  principal  offices.  (T.  D.  2137.) 

Corporations  Closed:  A  corporation  formed  as  a  family  affair  to 
hold  property  together  does  not  come  within  the  class  of  organizations 
specifically  enumerated  as  exempt  from  making  return.  (T.  D.  2137.) 

Corporations  Owned  by  Exempt  Organizations:  A  corporation 
whose  stock  is  owned  "by  an  association  organized  and  operated  exclu- 
sively for  religious,  charitable,  scientific  or  educational  purposes,  no  part 


112  TREASURY  DECISIONS 

of  whose  net  income  inures  to  benefit  of  any  member,  stockholder  or  in- 
dividual," required  to  make  return  of  annual  income. 

The  fact  that  stock  of  corporation,  except  shares  qualifying  direc- 
tors, is  owned  by  corporation  which  itself  comes  within  the  class  of  ex- 
empt organizations,  does  not  relieve  first  named  corporation  Irom  liabil- 
ity under  Income  Taw  Law.  Liability  of  a  corporation  not  contingent 
upon  ownership  of  its  stock.  (T.  D.  2137.) 

Corporations  Operating  Leased  or  Purchased  Property:  A  corpo- 
ration which  has  leased  its  properties  in  consideration  of  a  rental  equiv- 
alent to  a  certain  rate  of  dividends  on  its  outstanding  capital  stock  and 
interest  on  bonded  indebtedness,  and  such  rental  is  paid  by  lessee  direct 
to  stockholders  and  bondholders,  should  nevertheless  make  return  show- 
ing the  rental  so  paid  as  having  been  received  by  corporation.  (Art.  80 
Reg.  33.) 

Payments  measured  by  a  fixed  percentage  on  stock  of  railroad 
corporation  to  lines  released  by  another  railroad  on  which  rent  is  pay- 
able by  lessee  direct  to  stockholders,  have  status  of  rental  payments. 

In  such  case  to  the  lessee  such  payment  is  expense  of  operation;  to 
the  lessor,  income. 

A  contract  which  provides  that  rental  shall  be  paid  to  a  third  party, 
and  not  party  to  contract,  does  not  change  character  of  payment,  nor 
relieve  lessor  from  liability  to  tax  on  such  payments.  The  income  of 
third  party,  the  stockholder,  is  dividends  on  stock  which  he  holds  on 
lessor  company.  Dividends  cannot  be  paid  unless  lessor  has  income 
out  of  which  to  pay  them.  Hence  lessor  company  is  required  under  law 
to  return  as  income  the  rentals  which  lessee  is  required  to  pay.  In 
paying  direct  to  stockholders,  lessee  is  acting  agent  of  lessor  and  amount 
received  by  stockholders  are  in  fact  dividends  received  out  of  earnings 
of  lessor.  (T.  D.  2090.) 

Such  a  company,  operating  leased  or  purchased  lands,  shall  include 
all  receipts  derived  therefrom,  and,  if  bonded  indebtedness  of  such  lines 
have  been  assumed,  such  operating  company  may  deduct  interest  there- 
on, not  exceeding  one-half  of  sum  of  its  interest  bearing  indebtedness 
and  its  paid-up  capital  stock  at  close  of  year.  (Art.  81,  Reg.  33.) 

Corporations  operating  leased  lines  should  not  include  capital  stock 
of  lessor  corporations  in  their  own  statement  of  capital  stock  outstand- 
ing at  close  of  year.  The  indebtedness  of  such  lessor  corporation  should 
not  be  included  in  statement  of  debtedness  of  lessee  unless  lessee  has 
assumed  the  same.  (Art.  82,  Reg.  33.) 

Corporations  in  Existence  But  Part  of  Year:  All  corporations  hav- 
ing an  existence  during  all  or  any  part  of  a  year,  are  required  to  make 
return.  Dissolved  corporations,  whose  fiscal  year  co-incides  with  cal- 
endar year  will  make  return  covering  the  period  from  January  1st,  to 
date  of  dissolution,  and  corporations  having  a  fiscal  year  other  than 
calendar  year  will  make  returns  covering  period  from  beginning  of  fis- 
cal year  to  date  of  dissolution,  and  new  corporations  will  make  return 
for  period  from  date  of  their  organization  to  December  31st.  The  net 
income  in  all  such  cases  will  be  ascertained  in  manner  set  out  in  Par- 
agraph (G)  relating  to  corporations.  (T.  D.  2090.) 

Corporations  Organized  During  Tax  Year:  Corporations  organized 
during  year  should  render  a  sworn  return  covering  that  portion  of  year 
during  which  it  was  engaged  in  business  or  had  an  income  accruing  to  it. 
(Art  84,  Reg.  33.) 

Corporation  Organized  But  Transacting  No  Business  Witnhi  Year 
of  Its  Organization:  A  corporation  organized  and  transacting  no  busi- 
ness within  the  calendar  year  of  its  organization,  must,  nevertheless, 
make  and  file  a  return  on  the  basis  of  the  calendar  year  unless  such  cor- 
poration designate  a  fiscal  year  other  than  calendar  year  in  the  man- 
ner and  form  provided  for  that  purpose.  (T.  D.  2090.) 

Corporation  Liquidating  During  Tax  Year:  Corporations  going 
into  liquidation  during  any  tax  year  may  at  time  of  such  liquidation  pre- 


TREASURY  DECISIONS  113 

pare  a  "Final  Return"  covering  income  during  the  fractional  part  of  the 
year  during  which  they  were  engaged  in  business  and  immediately  file 
same  with  the  collector  of  the  district  in  which  corporation  has  its  prin- 
cipal place  of  business.  (Art.  85,  Reg.  33.) 

Corporations  Dissolving  Before  Time  For  Making  Returns:  Cor- 
poration which  has  continued  in  business  to  a  calendar  year  cannot 
evade  liability  of  special  excise  taxes  imposed  by  Act  of  August  5th, 
1909,  Section  38,  by  dissolving  before  time  when  return  required  is  to 
be  made.  (U.  S.  v.  General  Inspection  &  Loading  Co.,  192F,  223.) 

Under  Corporation  Act  N.  J.,  Section  53-55,  the  officers  of  a  dis- 
solved corporation  which  were  also  directors,  have  authority  to  make 
return  of  its  business  of  preceding  year  on  which  it  has  incurred  lia- 
bility for  special  tax  imposed  by  Act  of  August  5th,  1909,  Section  38. 

Corporations  Not  Completely  Organized:  Corporations  which  have 
applied  but  never  received  charters,  or  corporations  which  have  re- 
ceived charters  but  have  never  perfected  their  organizations,  transact- 
ed no  business,  and  have  had  no  income  from  any  source,  may  upon 
presentation  of  these  facts  to  Collector  be  relieved  from  making  return 
of  income  as  long  as  they  remain  in  this  unorganized  condition.  (T.  D. 
2152.) 

Foreign  Corporations:  Similar  tax  should  be  levied,  assessed  and 
paid  annually  by  corporations,  joint-stock  companies,  or  associations 
and  insurance  companies  organized,  authorized  or  existing  under  laws 
of  any  foreign  country  upon  amount  of  income  accruing  from  busi- 
ness ^transacted  in  the  United  States  as  that  paid  by  domestic  corpora- 
tions. (Art.  77,  Reg.  33.) 

Tax  on  Foreign  Corporations:  Foreign  corporations  shall  be  sub- 
ject to  normal  tax  (six)  per  cent,  computed  upon  income  received 
by  such  corporation  from  business  transacted  and  capital  invested  in  this 
country.  (Art.  157,  Reg.  33.) 

Foreign!  Corporations  Having  Several  Branches  in  <he  United 
States:  A  foreign  corporation  having  several  branches  in  the  United 
States  should  designate  one  of  such  branches  as  its  principal  office, 
and  should  also  designate  proper  officers  to  make  required  return.  (Art. 
83,  Reg.  33.) 

Tax  Upon  Corporations  coming  within  terms  of  this  law  are  sub- 
ject to  normal  tax  only;  that  is,  the  tax  computed  on  level  rate  of  (6) 
per  cent,  of  entire  net  income  regardless  of  amount  of  such  income. 

Corporations  Exempt  Include  Foreign  as  Well  as  Domestic  Corpo- 
rations: It  is  held  that  exemption  provisions  specified  in  Section  11,  un- 
der heading  "Conditional  and  Other  Exemptions,"  includes  foreign  as 
well  as  domestic  corporations. 

Under  the  Federal  Income  Tax  Law  of  September  8th,  1916,  which 
provides  that  every  organization  enumerated  in  Section  II  shall  be  ex- 
empt, on  its  earnings  or  income,  this  office  holds  that  this  applies 
whether  organization  be  domestic  or  foreign.  (Commissioner  W.  H. 
Osborn,  September  6th,  1916.) 

Corporation  Specifically  Exempt,  Class:  A  corporation  is  not  ex- 
empt simply  because  it  is  primarily  not  organized  for  profit.  If  income 
within  meaning  of  law  accrues  to  a  corporation  not  organized  for  profit, 
such  income  subject  to  tax  imposed  by  this  act.  (T.  D.  2152.) 

Exempt  Corporations  Are  Subject  to  the  Withholding  Provisions  of 
Act  of  September  8th,  1916:  Section  11  of  this  Act  provides  that  there 
shall  not  be  taxed  under  this  title  any  (and  then  fourteen  different 
kinds  of  corporations  and  associations  are  named).  Is  held  under  this 
langauge  that  the  statute  relieves  from  tax  the  income  of  the  corporation 
or  organizations  named  in  Paragraph  (A)  of  Section  11,  and  that  said 
corporation  or  organizations  are  required  to  answer  under  all  other 
provisions  of  the  statutes  as  to  withholding  and  making  returns  of  tax 
withheld.  (T.  D.  2407.) 


114  TREASURY  DECISIONS 

Exempt  Corporations  Must  on  Request  Prove  Right  of  Exemption: 
All  corporations  and  beneficiary  societies  must  at  request  of  Collector 
or  Commissioner  of  Internal  Revenue  establish  their  right  to  exemption. 
In  absence  of  such  a  showing,  such  organization  may  at  any  time  be 
required  to  make  annual  returns,  in  order  that  status  of  company  may 
be  determined.  (Art.  88,  Reg.  33.) 

Corporations  Whose  Right  to  Exemption  Is  Questionable:  Any 
corporation  whose  status  under  the  law  is  in  doubt,  or  which  does  not 
clearly  come  within  one  or  another  class  of  those  enumerated  as  ex- 
empt, should  file  a  returns  blank,  and  attach  thereto  a  statement  of  the 
nature  of  the  organization,  source  of  its  income,  disposition  made  of 
same,  and  particularly  of  any  surplus.  (Art.  91,  Reg.  33.) 

Corporations  Having  Once  Shown  Their  Exemption  Need  Not  Do 
So  Again:  In  all  cases  where  organizations  have  clearly  established,  to 
the  satisfaction  of  collectors  that  they  are  exempt,  names  of  such  or- 
ganizations should  be  eliminated  from  Form  632,  and  further  return  will 
not  be  required  of  them  so  long  as  they  operate  in  accordance  with  evi- 
dence upon  which  ruling  holding  them  exempt  was  predicated. 

Such  organizations  having  once  satisfied  collector  of  their  ex- 
emption are  not  required  to  make  further  showing  unless  collector  has 
reason  to  believe  change  of  status,  or  that  it  has  income  inuring  to  bene- 
fit of  members.  (Letter  1148  to  collectors.) 

Gross  Income  of  Manufacturing  Corporations:  Shall  consist  of 
total  sales  of  manufactured  goods  during  the  year  covered  by  return, 
increased  or  decreased  by  gain  or  loss  as  shown  by  inventories  of  fin- 
ished and  unfinished  products,  raw  material,  etc.;  at  beginning  and  end 
of  year.  To  this  amount  should  be  added  the  income,  gains,  or  profits 
from  all  other  sources,  as  shown  by  books  of  accounts.  (Art.  144,  Reg. 
33.) 

Gross  Income  of  Mercantile  Corporations:  Shall  include  total  sales 
during  year,  increased  or  decreased  by  gain  or  loss  as  shown  by  in- 
ventories of  merchandise  at  the  beginning  and  end  of  year  for  which 
return  is  made;  this  amount  should  be  added  the  income,  gains  or 
profits  derived  from  all  other  sources.  (Art.  105,  Reg.  33.) 

Gross  Income  of  Miscellaneous  Corporations:  Shall  consist  of  to- 
tal revenue  derived  from  management  of  business  and  property  or  cor- 
poration making  return,  together  with  all  amounts  of  income  from  all 
other  sources,  as  shown  by  books  of  accounts  (Art.  106,  Reg.  33.) 

Gross  Income  of  Corporations  Conducting  More  Than  One  Class  of 
Business:  Where  a  corporation  is  engaged  in  carrying  on  more  than 
one  class  of  business,  gross  income  derived  from  different  classes  of 
business  shall  be  ascertained  according  to  definitions  above,  and  which 
are  applicable  thereto.  (Art.  112,  Reg.  33.) 

Corporations,  Foreign:  For  the  purpose  of  a  tax  of  the  net  income 
of  such  foreign  organizations  shall  be  ascertained  by  deducting  from 
gross  income  arising,  received,  or  accruing  from  business,  done  and  cap- 
ital invested  in  this  country,  received  within  the  year  from  all  sources 
in  the  United  States,  the  deductions  enumerated  in  the  act.  which  de- 
ductions shall  be  limited  to  expenditures  or  charges  actually  incurred 
in  operation  of  business  transacted  and  capital  invested  in  the  United 
States,  or  as  to  certain  charges,  such  proportion  of  aggregate  charges 
as  the  gross  income  bears  to  the  aggregate  income  within  and  without 
the  United  States.  In  other  words,  deductions  from  gross  income  of 
foreign  corporations  doing  business  in  this  country  should,  as  nearly 
as  possible,  represent  the  actual  expenses  and  authorized  charges  inci- 
dent to  the  business  done,  and  capital  invested  in  this  country,  and 
must  not  comprehend  either  directly  or  indirectly  any  expenditures  or 
charges  incurred  in  the  transaction  of  business  or  the  investment  of 
capital  without  the  United  States.  (Art.  157,  Reg.  33.) 

Corporations  Foreign,  Deriving  Their  Taxable  Income  Solely  From 


TREASURY  DECISIONS  115 

Stocks  or  Bonds  of  Domestic  Corporations:  Deductions  Permitted:   The 

liability  of  a  foreign  corporation  to  income  tax  on  income  is  received  by 
it  from  stocks  and  bonds  on  domestic  corporations  exists  because  of 
the  fact  that  such  corporation  has  capital  invested  in  security,  the 
income  from  which  has  its  source  in  the  United  States. 

It,  therefore,  follows,  that,  as  income  arising  and  accruing  to  a 
foreign  corporation  from  capital  invested  in  stocks  and  bonds  of  do- 
mestic corporations,  is  subject  to  the  tax  imposed  by  Section  2,  Act  of 
October  3,  1913,  it  will  be  permissible  for  such  a  corporation  although 
its  income  from  the  United  States  is  derived,  "solely  in  the  form  of 
dividends  and  interest"  on  domestic  stocks  and  bonds,  to  deduct  from 
gross  income  so  received  any  or  all  of  the  items  scheduled  in  the  law 
as  proper  deductions  in  the  case  of  a  foreign  corporation,  regardless 
of  source  of  the  income,  provided  the  amount  so  deducted  will  not 
exceed  the  limit  defined  in  schedule  of  allowable  deductions. 

It  is  contemplated  by  this  ruling,  however,  that  in  as  far  as  prac- 
ticable deductions  shall  comprehend  only  such  expenditures,  losses,  etc., 
as  are  incurred  in  or  are  incidental  to  the  creation  of  the  income  against 
which  they  are  charged,  in  all  cases  deductible  amount  must  be  within 
the  limit  fixed  by  law.  (From  letter  signed  by  Commissioner  W.  H.  Os- 
born,  and  dated  June  6,  1916.) 

Corporations  Foreign,  Interest  Accrued  and  Paid  on  Indebtedness: 

Foreign  Corporations  in  determining  interest  the  maximum  principal 
upon  interest  for  purpose  of  deduction  may  be  computed,  will  add  to 
the  amount  of  its  paid-up  capital  stock,  or  if  no  capital  stock,  then 
amount  of  capital  employed  in  business,  one-half  the  interest-bearing  in- 
debtedness, both  outstanding  at  the  close  of  the  year.  Such  proportion 
of  this  sum  as  the  gross  income  derived  from  business  transacted  in 
this  country  bears  to  the  gross  income  or  capital  invested,  both  within 
and  without  the  United  States,  will  constitute  the  maximum  principal 
upon  which  inerest  for  which  purpose  of  a  deduction  from  income  in 
the  United  States,  may  be  computed.  For  instance,  if  the  gross  income 
in  the  United  States  is  one-fourth  of  the  entire  gross  income,  then  one- 
fourth  of  the  sum  of  the  paid-up  capital  stock  plus  one-half  the  inter- 
est-bearing indebtedness  will  be  maximum  principal  upon  which  inter- 
est deductible  from  the  United  States  income  may  be  computed.  (T. 
D.  2090.) 

Return  by  Every  Corporation  Unless  Specifically  Exempt  Shall  File: 

Every  corporation  not  specifically  enumerated  as  exempt  shall  make 
return  of  annual  net  income  required  by  law  whether  or  not  they  have 
any  income  liable  to  tax,  or  whether  or  not  it  shall  be  subordinate  or 
controlled  by  another  corporation.  (Art.  80,  Reg.  33.) 

Corporation;  Change  of  Name:  The  mere  change  of  name  does  not 
constitute  a  new  corporation.  If  business  was  continued  throughout 
the  year,  no  change  in  management  other  than  change  of  name,  the 
returns  should  be  made  covering  the  business  transactions  throughout 
the  year,  such  returns  to  be  made  by  corporation  in  name  which  it  bears 
at  end  of  the  year,  with  a  notation  on  the  return  to  the  effect  that  name 
has  been  changed,  giving  old  and  new  names.  If  a  distinct  new  cor- 
poration is  organized  to  take  over  the  property  of  the  old,  both  cor- 
porations will  be  required  to  make  separate  returns  covering  the  periods 
of  the  year  during  which  they  were  respectively  in  charge  of  the  business. 
(T.  D.  2137.) 

Corporation;  Notice  to,  If  Return  Not  Filed  on  Time:  Where  re- 
quired returns  are  not  filed  within  prescribed  time  either  by  individuals 
or  corporations,  notice  on  Form  1045  should  in  each  case  be  sent  to 
delinquent.  (Art.  196,  Reg.  33.) 

Corporations;  Foreign  and  Domestic,  Doing  Business  in  Foreign 
Countries,  Extension  of  Time  in  Making  Return:  In  cases  wherein 
foreign  corporations  or  domestic  corporations  doing  busines  in  foreign 


116  TREASURY  DECISIONS 

countries  are  unable  to  assemble  their  data  in  time  to  make  their  return 
of  annual  net  income  within  the  prescribed  time,  it  will  be  permissible 
for  such  corporations  upon  showing  of  such  fact  to  file  with  collector 
of  internal  revenue  a  tentative  return  in  which  there  shall  be  approxi- 
mated as  nearly  as  possible  the  actual  business  transacted  during  the 
year. 

This  tentative  return  will  be  substituted  by  a  true  and  accurate 
return  as  soon  as  the  necessary  data  to  make  such  true  and  accurate 
return  shall  be  available. 

Collectors  of  internal  revenue  are  authorized  to  grant  an  extension 
of  time  not  in  excess  of  thirty  days  from  date  returns  are  due.  Such 
extension  should  be  granted  only  in  cases  wherein  the  neglect  to  file 
the  return  within  prescribed  time  was  due  to  sickness  or  absence  of 
an  officer  whose  signature  to  return  was  necessary.  Foreign  corpora- 
tions or  domestic  corporations  doing  business  in  foreign  countries  can- 
not be  granted  an  extension  of  time  merely  for  the  reason  that  they 
are  unable  to  assemble  their  data  to  make  the  returns  within  the  pre- 
scribed time.  In  all  such  cases,  liability  to  penalty  can  be  obviated  only 
by  filing  a  tentative  return  as  hereinbefore  indicated.  (T.  D.  2137.) 

Corporations,  Returns  By,  Must  Be  Made  on  Specified  Forms: 
Under  authority  conferred  by  this  act,  forms  have  been  pre- 
scribed, in  which  various  items  specified  in  the  law  are  to  be  stated. 
Blank  forms  of  this  return  will  be  forwarded  to  collectors  and  should 
be  furnished  to  every  corporation,  not  expressly  exempted,  on  or  before 
January  1st  of  each  year,  and  in  the  case  of  corporations  making  their 
return  for  the  calendar  year  on  or  before  the  1st  day  of  next  fiscal  year 
in  making  returns  for  their  fiscal  year.  Failure  on  part  of  any  corpora- 
tion, joint  stock  company,  etc.,  liable  to  this  tax,  to  receive  a  prescribed 
blank  form  will  not  excuse  it  from  making  return  required  by  law,  or 
relieve  it  from  any  penalties  for  failure  to  make  return  in  the  prescribed 
time.  Corporations  not  supplied  with  proper  forms  for  making  the 
return  should  make  applications  therefor  to  the  collector  of  internal 
revenues  in  whose  district  is  located  its  principal  place  of  business  and 
ample  time  to  have  its  return  prepared,  verified,  and  filed  with  the 
collector  on  or  before  the  last  due  day  as  hereinafter  defined.  Failure 
in  this  respect  subjects  it  not  only  to  50  per  cent  additional  tax,  but  to 
the  specific  penalty  imposed  for  delinquency.  Each  corporation  should 
carefully  prepare  its  return  so  as  to  fully  and  clearly  set  forth  the  data 
therein  called  for.  Imperfect  or  incorrect  returns  will  not  be  accepted 
as  meeting  the  requirements  of  the  law.  (Art.  163,  Reg.  33.) 

Corporations,  Forms  To  Be  Used  in  Making  Returns:.  Form  Nos. 
1030,  1030-a  and  1031  to  be  used  by  corporations  when  making  their 
returns  of  annual  net  incomes  as  follows:  No.  1030  by  insurance 
companies,  including  mutual  life  and  mutual  marines;  No.  1030-a  by 
mutual  insurance  companies  other  than  mutual  life  and  mutual  marine; 
No.  1031  by  all  other  corporations.  (T.  D.  1928.)  (Modified.) 

Corporations:.  Supplementary  Statements  on  Returns:  In  the 
case  of  Public  Service  and  all  other  corporations  it  is  desired  by  this 
office  that  the  supplementary  statement  which  forms  a  part  of  the  return 
form,  1031,  prescribed  by  the  Secretary  of  the  Treasury  for  the  use  of 
such  corporations  in  making  their  returns  of  net  income,  shall  be  pre- 
pared as  far  as  practicable  in  detail. 

It  is  not  expected  or  required,  however,  that  any  particular  item 
going  to  make  up  gross  income  or  deduction  therefrom  shall  be  set  out 
in  said  statement.  It  will  be  sufficient  for  the  purpose  of  this  office  in 
case  of  Public  Service  corporations  and  other  similar  concerns  that  they 
supply  the  information  by  classes  rather  than  give  the  items  in  detail 
the  income  and  expenditures  in  the  same  manner  as  required  as  to  these 
items  by  the  Interstate  Commerce  Commission.  (T.  D.  2197.) 

In  cases  where  employees  or  officers  of  a  corporation  are  paid  a 
stated  salary,  to  which  is  added  a  certain  percentage  of  the  net  profits 


TREASURY  DECISIONS  117 

of  the  corporation  as  compensation  for  services  rendered,  such  corpora- 
tion will  be  required  to  report  under  Item  4(a),  Form  1030  or  1031,  the 
amount  of  such  combined  payments  made  to  such  individuals  during  the 
year,  provided  combined  amount  is  $3,000  or  more.  (T.  D.  2152.) 

Corporations  Doing  Business  in  the  Philippines  and  Porto  Rico: 
Corporations  whose  business  is  done  wholly  in  Porto  Rico  and  the 
Philippines,  even  though  incorporated  in  the  United  States  and  held  to 
be  resident  corporations  of  these  possessions,  and  will  make  returns  and 
pay  income  tax  to  collectors  of  internal  revenue  having  jurisdiction  there. 
(T.  D.  2090.) 

Such  corporations  organized  under  the  laws  of  the  United  States,  or 
any  State  thereof,  resident  in  the  United  States  but  doing  business  in 
these  possessions,  are  taxable  in  the  United  States.  If  they  are  organ- 
ized under  the  laws  of  the  United  States  or  local  laws  of  these  posses- 
sions and  resident  in  said  possessions,  they  are  required  to  pay  their 
tax  in  the  Philippines  or  Porto  Rico  as  the  case  may  be.  HELD  that: 
"Principal  place  of  business"  of  a  corporation  is  place  of  office  in  which 
are  kept  the  books  of  accounts  and  other  data  from  which  return  is  to 
be  prepared.  (T.  D.  2090.) 

A  domestic  corporation  doing  the  greater  part  of  its  business  in 
the  United  States  and  having  principal  place  of  business  in  this  country 
and  transacting  business  in  Porto  Rico  through  a  branch  office  required 
to  report  its  return  of  net  income,  its  earnings  from  all  sources,  including 
those  arising  and  accruing  to  branch  in  Porto  Rico,  or  elsewhere. 

The  return  of  such  corporation  will  be  made  to  Collector  of  Internal 
Revenue  of  the  district  in  this  country  in  which  is  located  its  principal 
place  of  business.  (T.  D.  2137.) 

Corporations,  Fine  Against:  Where  an  action  is  brought  by  the 
United  States  against  delinquent  corporations  for  failure  to  file  return 
under  Corporation  Tax  Act,  Section  38,  the  verdict  must  specifically 
state  that  amount  of  the  penalty,  not  less  than  $1,000.00,  after  which 
the  corporation's  only  remedy  (other  than  an  appeal)  is  to  apply  for  a 
compromise  under  Revised  Statutes,  Sections  3229,  3469 — U.  S.  Comp. 
Stat.  1901,  ps.  2089,  2317 — United  States  v.  Acorn  Roofing  Company, 
204  Fed.  157. 

Corporations,  Fine  Against  Officers:  In  case  of  an  officer  of  a 
corporation  or  like  institution  charged  with  the  duty  and  responsibility 
of  making  and  veryifying  a  return,  who  makes  a  false  or  fraudulent 
return,  with  intent  to  deceive  or  evade  any  assessment  of  tax,  he  shall 
be  guilty  of  a  misdemeanor,  and  be  subject  to  a  fine  not  to  exceed 
$2,000.00,  or  to  imprisonment  not  to  exceed  one  year,  or  ooth,  at  the 
discretion  of  the  court,  with  costs.  (T.  D.  1950.) 

Penalties;  Corporations:  In  the  case  of  neglect  or  refusal  to  make 
and  verify  a  return  within  the  prescribed  time  (except  in  case  of  sick- 
ness or  absence)  50  per  cent  is  to  be  added  to  the  tax.  (T.  D.  1950.) 

In  case  of  (intentional)  neglect  or  refusal  to  make,  or  for  a  false 
or  fraudulent  return  made,  100  per  cent  is  to  be  added  to  the  tax. 
(T.  D.  1950.) 

Corporation  Sale  of  Assets  of  Another  Corporation  for  Stock, 
Share  for  Share  of  Like  Par  Value,  in  the  New  Vendee  Corpora- 
tion to  an  Amount  Equal  to  an  Entire  Issued  Capital  Stock  of  the  Old. 
Vendor  Corporation,  Which  Stock  Because  of  Increased  Value  of  Assets 
Is  Admittedly  Worth  Double  Par:  Exchange  of  stock,  that  is  the  issu- 
ance of  stock  by  the  second  corporation  for  the  stock  of  the  first  corpora- 
tion, share  for  share  of  like  par  value,  would  not  constitute  a  stock  divi- 
dend, and  in  exchange  on  basis  indicated,  would  not  result  in  any  taxable 
income  to  the  stockholders  of  the  first  company  receiving  in  exchange 
for  their  former  holdings  the  stock  of  the  second  company.  The  stock 
both  authorized  and  issued,  being  in  both  cases  of  like  par  value  and  be- 
ing predicated  upon  exactly  the  same  assets,  the  transaction  constitutes  a 
deal  by  which  the  second  company  takes  over  the  assets  of  the  first 


118  TREASURY  DECISIONS 

company,  giving  therefor  its  stock  of  a  par  value  exactly  equal  to  the 
par  value  of  the  stock  of  the  first  company  outstanding,  thus  placing  in 
the  hands  of  the  stockholders  the  same  number  of  shares  of  the  second 
company,  and  the  same  par  value  as  that  which  they  therefore  held  in  the 
first  company,  the  stock  in  both  cases  being  supported  by  the  same  assets. 

Hence,  such  transaction  results  in  no  gains,  profits,  or  income  to 
either  the  first  corporation  or  its  stockholders. 

In  case  stock  of  the  first  company  at  the  time  of  such  transaction  is 
worth  "double  par"  the  stock  of  the  second  company  being  supported 
by  identically  the  same  assets  is  presumably  of  the  same  value,  and  the 
exchange  of  the  new  stock  for  the  old,  results  in  no  income  subject  to 
the  tax.  It  is  simply  an  exchange  of  assets  of  like  character  and  like 
value. 

If  stockholders  in  new  company  shall  hereafter  sell  their  stock,  they 
will  be  required  to  account  for  as  taxable  income,  any  amount  which  they 
may  receive  for  the  same  in  excess  of  the  cost  to  them  of  the  stock  of 
the  first  company.  (Acting  Commissioner  David  A.  Gates,  March  9th, 
1917.) 

Extension  of  Time  for  Filing  Income  Tax  Returns  oy  Corporations 
Making  Returns  on  Fiscal  Year  Basis:  Under  the  Act  of  October  3, 
1917,  a  corporation  which  has  named  August  31st  as  close  of  fiscal  year 
will  be  given  an  extension  of  time  upon  application  showing  reasonable 
cause  for  delay  in  making  income  and  excess  profit  tax  returns  on  basis 
of  fiscal  year.  (Commissioner  Daniel  C.  Roper,  October  15,  1917.) 

Final  Return  in  the  Case  of  a  Corporation  Liquidating  During  the 
Past  Year:  Under  the  regulations  of  this  office,  at  the  time  a  corpora- 
tion dissolves  or  liquidates,  it  is  required  to  make  what  is  termed  a  "final 
return,"  and  if  such  return  shows  a  net  income  for  that  portion  of  the 
year  during  which  the  corporation  was  in  business,  the  proper  officer  of 
the  corporation  should  retain  sufficient  funds  out  of  which  to  pay  the 
income  tax  assessable  on  the  basis  of  the  income  so  returned.  If  the  fund 
for  this  purpose  are  not  retained,  this  office  will  look  primarily  to  the 
officers  of  the  corporation  for  the  payment  of  the  taxes  shown  to  be  due, 
and  should  they  fail  to  pay  the  tax,  the  government  will  look  to  the  stock- 
holders for  its  payment.  (Acting  Commissioner  David  A.  Gates,  March 
22nd,  1917.) 

Tax  of  6%  Withheld  on  Interest  on  Corporate  Obligations  Payable 
to  Non-Resident  Foreign  Corporations  on  and  After  October  4th,  1917: 
Paying  agents  of  interest  on  bonds  of  domestic  corporations  owned  by 
foreign  corporations  not  engaged  in  business  in  the  United  States  and 
having  no  office  or  place  of  business  therein  are  required  to  deduct  and 
withhold  the  tax  of  6%  on  and  after  October  4th,  1917.  (T.  D.  2547.) 

Tax  to  Be  Deducted  at  Source  on  Dividends  Paid  on  Stock  Actually 
Owned  by  Non-Resident  Alien  Corporations  Not  Engaged  in  Business, 
Etc.;  If  Paying  Corporation  Is  So  Informed,  Although  Record  Owner  Is 
Non-Resident  Alien  Individual  or  Partnership:  Inasmuch  as  the  certifi- 
cates shown  that  the  actual  owners  of  the  stock  are  non-resident  alien 
corporations,  subject  to  the  deduction  of  the  normal  tax  at  the  source  and 
such  information  is  now  in  the  hands  of  the  paying  corporation  the  nor- 
mal tax  should  be  deducted  from  any  future  dividends  upon  the  stock  in 
question.  And  as  far  as  previously  paid  dividends  upon  the  stock  the  Col- 
lector of  the  Internal  Revenue  should  be  informed  as  to  the  amounts  of 
dividends  paid  during  the  years  1916  and  1917  from  which  an  income  tax 
was  withheld  in  said  case.  (Deputy  Commissioner  L.  F.  Speer,  October 
6th,  1917.) 

Deduction  at  the  Source  on  Corporate  Security  Interest  Payments  to 
Non-Resident  Alien  Co-Partnerships:  Under  the  provisions  of  the  Fed- 
eral Income  Tax  Law  of  September  8th,  1916,  as  amended  by  the  war 
revenue  act  of  October  3rd,  1917,  no  form  of  income  derived  from  sources 
within  the  United  States  by  a  foreign  co-partnership  having  no  office  or 


TREASURY  DECISIONS  119 

place  of  business  in  the  United  States  is  subject  to  withholding  of  normal 
income  tax  at  the  source.  (Commissioner  Daniel  C.  Roper,  October  26th, 
1917.) 

Deduction  of  Tax  at  the  Source  on  Dividends  Paid  to  Non-Resident 
Alien  Corporations  Is  at  2%  Rate:  Domestic  corporation  paying  divi- 
dend to  foreign  corporations  having  no  office  or  place  of  business  in  the 
United  States  should  withhold  2%  only.  (Commissioner  Daniel  C.  Roper, 
October  29th,  1917.) 

Coupons  From  Foreign  Owned  Bonds  Belonging  to  Domestic  Cor- 
porations: In  such  case  the  bank  should  use  Form  1001  and  strike  out 
in  line  (2)  of  certificate  the  words  "Bonds,  from  which  were  detached  the 
accompanied"  so  that  the  declaration  will  be  of  ownership  of  coupons. 

Monthly  Return  to  Be  Filed  by  Withholding  Agents  Receiving 
Coupons  Without  Certificates:  Withholding  agents  receiving  coupons 
not  accompanied  by  certificates  of  owners  are  required  to  file  monthly 
and  annual  return  in  duplicate. 

Required  monthly  return,  Form  1044,  shall  give  list  of  all  coupon  or 
interest  payment  made  on  which  the  normal  tax  was  deducted  and 
withheld,  and  shall  show  name  and  address  in  full  of  owner  of,  or  the 
person  presenting  such  coupons  or  interest  orders;  if  owners  not  known, 
amount  of  income  subject  to  tax  and  amount  withheld.  (Art.  53, 
Reg.  33.) 

Damages:  An  amount  received  as  a  result  of  a  suit  for  personal 
injuries  is  held  to  be  income.  An  amount  thus  received  would  be 
similar  to  an  amount  paid  to  a  person  insured  by  accident  policy  on 
account  of  accident  sustained.  (T.  D.  2135.) 

Debtor,  Denned:  A  "debtor"  as  hereinafter  used  shall  apply  to  all 
corporations,  joint  stock  companies,  associations  and  insurance  com- 
panies. (Art.  38,  Reg.  33.) 

Debts  Deductible  by  Citizens  or  Residents:  A  worthless  debt  as 
contemplated  by  the  income  tax  law  is  a  debt  actually  ascertained  worth- 
less and  charged  off  within  the  taxable  year.  (T.  D.  2090.) 

Debts  arising  from  unpaid  wages,  rents  and  other  items  of  taxable 
income  due  and  payable  on  or  after  March  1st,  1913,  will  not  be  allowed 
as  general  deductions  unless  the  income  which  they  represent  has  been 
included  in  gross  income  for  the  year  in  which  deduction  is  sought  to  be 
made. 

All  debts  payable  prior  to  March  1st,  1913,  and  not  ascertained  to  be 
worthless  prior  to  that  date  are  held  to  be  allowable  deductions  for  the 
year  in  which  they  are  actually  ascertained  to  be  worthless  and  are 
charged  off.  (T.  D.  2224.) 

Debts  Charged  Off  on  Recovery  Prior  to  January  1st,  1909:  The 
fact  that  a  bad  debt  has  been  previously  charged  off  and  this  appeared 
from  assets  of  bank,  even  prior  to  1909,  does  not  make  it  any  the  less 
income  for  year  in  which  recovered.  Neither  the  date  on  which  it  was 
charged  off  nor  the  fact  that  it  is  not  deducted  from  gross  income  for 
tax  purposes  in  any  way  affect  its  character  as  income  for  year  in  which 
recovered.  (Acting  Commissioner  David  A.  Gates,  February  11,  1916.) 

Debts;  Bad:  Bad  debts,  if  charged  off  the  company's  books  during 
the  year,  are  proper  deductions.  But  if  such  debts  are  subsequently 
collected,  they  must  be  treated  as  income.  (Art.  125,  Reg.  33.) 

Manner  of  Determining  When  a  Bad  Debt  May  Be  Considered 
Worthless  and  Be  Treated  as  a  Loss:  This  office  does  not  require  in 
the  case  of  an  individual  debtor,  that  an  unsatisfied  judgment  shall 
exist,  or  judicial  determination  be  reached  in  order  that  a  creditor  may 
secure  the  benefit  of  a  deduction  on  account  of  a  debt  which  he  con- 
siders worthless  and  uncollectible,  but,  taking  into  consideration  the 
time  the  debtor  has  overrun  and  the  financial  condition  of  the  debtor,  it 


120  TREASURY  DECISIONS 

is  required  that  it  be  shown  beyond  a  reasonable  doubt  that  the  debtor 
is  worthless  and  uncollectible. 

The  office  holds  that  a  debt  due  from  a  corporation  possessed  of 
assets  cannot  be  claimed  as  a  deduction  except  for  the  year  during 
which  the  corporation's  affairs  are  finally  closed  and  its  receiver  in 
bankruptcy  discharged;  and  where  a  creditor,  to  protect  himself  from 
a  total  loss  enters  into  a  compromise  agreement  under  the  terms  of 
which  he  accepts  a  part  payment  of  a  debt  and  releases  the  debtor  from 
payment  of  the  balance,  the  unpaid  portion  may  be  claimed  as  a  deduc- 
tion. (Commissioner  Daniel  C.  Roper,  October  16,  1917.; 

Insane  Deceased  or  Insolvent  Persons;  Delay  in  Payment  of  Tax 
from  Estate:  With  reference  to  that  part  of  the  Income  Tax  Law  which 
reads  as  follows:  "Any  sum  or  sums  due  unpaid  after  the  15th  day  of  June 
in  any  year  and  for  10  days  after  notice  and  demand  thereof  by  the 
collectors,  there  shall  be  added  the  sum  of  5  per  cent  per  month  on 
taxes  unpaid,  and  1  per  cent  per  month  upon  said  taxes  from  the  time 
the  same  became  due  except  from  the  estates  of  insane,  deceased  or 
insolvent  persons."  The  office  holds  that  the  exemption  provision 
therein  applies  in  case  of  nonpayment  of  tax  by  reason  of  insanity, 
decease  or  insolvency  of  the  taxpajrer  occurring  after  a  personal  return 
has  been  rendered  by  an  incapacitated  person.  Second,  the  provision 
does  not  relate  to  fiduciaries  required  to  make  returns  under  the  law. 

Decedent,  Payment  of  Tax  by  Representative  on  Income  Accrued 
to  the  Time  of  His  Death:  Held  that  income  due  from  deceased  per- 
son is  a  debt  against  the  state  in  hands  of  representative,  and  such 
representative  will  file  a  return  for  the  decedent  that  the  tax  due  the 
government  may  be  determined  and  paid.  (T.  D.  2152.) 

If  income  of  decedent  from  January  1st,  of  the  year  in  which  he 
died  to  tne  date  of  his  death  amounted  to  three  thousand  dollars 
($3,000.00)  or  over,  a  return  must  be  filed  by  his  representative  on 
Form  1040,  revised,  and  all  deductions  and  exemptions  to  which  he 
would  be  under  the  law  entitled  to  may  be  claimed  by  such  representa- 
tive. (T.  D.  2090.) 

Income  Accruing  to  Decedent  Dying  After  March  1st,  1913,  But 
Before  October  3rd,  1913,  Taxability  of:  (Decision)  Brady  et  al.,  Ex- 
exutors,  v.  Anderson,  Collector,  U.  S.  Dist.  Ct.  of  N.  Y.,  Aug.  24th,  1916.) 

Action  by  plaintiff  in  capacity  as  administrator,  to  recover  tax 
assessed  against  net  income  of  intestate  from  March  1st,  1913,  to  July 
22nd,  1913,  date  of  intestate's  death. 

The  liability  of  a  person  who  lived  after  March  1st,  1913,  the  date 
the  income  tax  was  to  be  computed  from,  and  died  before  October  3rd, 
1913,  date  of  approval  of  the  Act;  in  such  case,  should  the  tax  be 
assessed  upon  his  income  accruing  between  March  1st,  1913,  and  the 
date  of  his  death? 

The  court  held  that  inasmuch  as  the  act  was  retroactive,  it  would 
include  all  income,  whether  accruing  to  a  living  person,  or  to  the  estate 
of  a  decent.  Court  rendered  judgment  in  favor  of  defendant. 

Tax  Need  Not  Be  Deducted  Even  Though  Form  1019  Is  Filed: 
Certificates  are  not  required  in  case  where  the  payor  of  income  to  an- 
other person  has  knowledge  of  non-taxability  of  payee  under  the  Income 
Tax  Law;  but  payor  is  responsible  for  accuracy  of  the  facts  under 
Penalties  imposed  by  the  Law. 

If  a  fiduciary  file  certificate  1019,  revised,  leaving  duty  upon  debtor 
corporation  to  withhold  normal  tax,  and  debtor  corporation  has  knowl- 
edge of  non-taxable  character  of  its  payments,  to  such  fiduciary  or 
beneficiary,  the  certificate  may  be  offset  by  showing  that  said  income  is 
not  taxable  in  hands  of  ultimate  recipient. 

Any  amount  of  tax  erroneously  withheld  and  paid  to  government 
may  be  recovered  by  showing  the  facts  in  claim  for  refund  as  provided 
by  Article  33  (c),  Reg.  33  of  January  5th,  1914. 


TREASURY  DECISIONS  121 

Income,  Items  Deductible  and  Not  Deductible:  In  referring 
to  the  difference  between  expenses  of  administration  of  estates  set 
forth  as  not  allowable  deductions  in  T.  D.  2090,  and  expenses  itemized 
as  allowable  deductions  on  Form  1041,  revised  (old  form),  distinction 
is  sought  to  be  made  between  first  expenses  as  are  properly  chargeable 
against  an  estate  as  an  entity  and  other  expenses  incident  to  administra- 
tion which  may  arise  in  its  management. 

Among  former  T.  D.  2090  cites  court  costs,  attorney's  fees,  execu- 
tor's commissions,  etc.,  and  among  latter  may  be  cited  usual  necessary 
expenses  of  carrying  on  business,  including  salaries,  wages,  rentals  paid 
and  such  repairs  as  are  necessary  and  do  not  constitute  improvements 
which  increase  the  value  of  the  estate.  The  former  is  meant  to  apply 
to  expenses  that  reduce  estate  in  administrator's  hands  and  latter  to 
legitimate  expenses  that  reduce  income  accruing  to  beneficiaries,  but 
not  estate  itself.  (T.  D.  2135.) 

Inheritance  Taxes  Not  Deductible:  Collateral  inheritance  taxes 
levied  under  laws  of  a  state  being  as  it  is  charged  against  corpus  of 
estate  does  not  constitute  an  allowable  deduction  in  computing  tax 
liability  either  to  estate  or  beneficiary. 

Tax-Free  Clause:  Where  a  trustee  holds  bonds  issued  by  a  cor- 
poration, joint  stock  company,  etc.,  which  contain  tax-free  clause  and 
ownership  certificate,  No.  1019,  revised,  claiming  no  exemption,  is  filed 
with  debtor  corporation  or  its  duly  authorized  agent,  the  amount  of 
interest  derived  from  the  bonds  may  be  entered  in  Column  A,  Page  2, 
of  Form  1041,  revised,  as  income  from  which  normal  tax  had  been 
withheld  at  source. 

Payment  in  Aggregate  Governs  Deduction  of  Tax  at  Source,  Re- 
gardless of  Varying  Character,  Constituting  Income:  The  normal  tax 
should  be  withheld  whenever  aggregate  payments,  fixed  or  determinable 
income  to  an  individual  in  any  one  calendar  year  exceeds  $3,000,  re- 
gardless of  varying  character  of  income  entering  into  payments.  (Art. 
65,  Reg.  33.) 

Quarters,  heat  and  light,  and  mileage,  payments  of,  while  traveling 
under  orders,  indefinite  and  irregular  as  to  amount  and  tune  of  accrual 
and  therefore  not  subject  to  withholding  under  requirements  of  Income 
Tax  Law.  (T.  D.  2079.) 

Tax  Withheld  To  Be  Paid  to  Collector  of  Internal  Revenue:  Normal 
tax  shall  be  deducted  and  withheld  at  source  and  payment  made  to  col- 
lector of  internal  revenue  as  provided  by  the  law  by  debtor  or  by  his  or 
her  duly  authorized  agent  appointed  to  make  such  deduction  and  pay- 
ment. (Art.  34,  Reg.  33.) 

Tax  Deducted  at  Source  Not  To  Be  Deducted  Again  by  Agent  or 
Other  Person:  No  other  person,  organization,  in  whatever  capacity 
acting,  having  the  receipt,  custody  or  disposal  of  any  income  as  herein 
provided,  shall  be  required  to  again  deduct  and  withhold  normal  tax 
thereon. 

Tax  Deducted  at  Source,  Personal  Liability  For:  Field  officers  of 
the  bureau  are  under  obligations  to  see  that  proper  authorities  and 
proper  returns  are  made  by  both  individuals  and  withholding  individuals 
in  their  respective  districts.  When  such  officers  come  upon  evidence  that 
normal  tax  should  have  been  held  at  source,  they  should  satisfy 
themselves  whether  there  has  been  neglect  or  refusal  on  part  of  debtor 
corporations  or  withholding  agents  to  comply  with  requirements  of 
Income  Tax  Law. 

Taxpayers  and  withholding  agents  held  responsible  for  accuracy 
of  their  returns,  and  respective  liabilities,  cannot  be  shifted  from  one 
to  the  other. 

Imposition  of  penalties  named  in  law  by  reason  of  neglect  or  failure 
of  withholding  agent  to  make  proper  return  is  therefore  apart  from 
assessment  on  individual  returns;  therefore  individual  returns  of  annual 


122  TREASURY  DECISIONS 

net  income  on  Form  1040,  revised,  should  be  accepted  as  rendered  if 
made  with  requirements  of  form.  Withholding  agents,  however,  will 
be  held  liable  for  failure  to  deduct  and  pay  tax  for  which  under  terms 
of  law  they  are  personally  liable;  and  such  responsibility  remains  with 
withholding  agents  until  tax  due  has  been  received  by  the  Government. 
(Letter  No.  1265,  to  Collectors.) 

Tax  Not  Subject  to  Withholding  at  Source  Until  Payment  Is  Made 
Thereof.  (Deputy  Commissioner  L.  F.  Speer,  March  1st,  1915.) 

Deductions  Claimed  at  Time  of  Receipt  of  Income:  Under  Section 
9-b,  Act  of  September  8th,  1916,  when  any  amount  allowable  as  a  deduc- 
tion, in  Sections  5  and  6  of  the  Act,  is  known  at  time  of  receipt  of  in- 
come by  individual,  whose  income  is  subject  to  withholding,  he  may 
file  with  firm  or  corporation,  etc.,  making  such  payment  a  certificate, 
stating  amount  of  deductions  and  making  a  claim  for  the  allowance  of 
same,  whereupon  there  shall  be  no  withholding  upon  the  amount  of 
such  claim,  and  such  certificate  shall  become  a  part  of  return  by  person 
making  such  claim.  When  no  tax  has  been  withheld  because  of  such 
claim,  certificate  nevertheless  shall  be  forwarded  to  Collector  of  In- 
ternal Revenue  for  district  in  which  withholding  agent  resides. 

Certificate  Form  1088  is  provided  for  this  purpose.     (T.  D.  2412.) 

Tax  to  be  Deducted  Except  to  Extent  of  Exemption  Claims:  When- 
ever coupons  accompanied  by  certificate  of  an  individual,  resident  or 
citizen  of  the  United  States  are  presented  to  debtor  or  withholding  agent 
for  payment,  the  debtor  or  its  withholding  agent  shall  deduct  and  with- 
hold amount  of  normal  tax  except  to  the  extent  of  exemption  claimed 
in  certificate.  (Art.  44,  Reg.  33.) 

Deduction  of  Tax  at  Source  Applies  Only  to  Normal  Tax  on  Indi- 
viduals: Deduction  and  payment  of  tax  at  source  of  income  applies 
only  to  the  normal  tax  imposed  upon  individuals.  (Art.  29  Reg.  33.) 

Interest  Which  Constitutes  an  Allowable  Deduction  from  gross  in- 
come under  Federal  Income  Tax  Law  is  amount  actually  paid  within  the 
year  on  the  maximum  principle  ascertained  by  adding  the  full  amount 
of  the  paid  up  capital  stock  at  the  close  of  the  year,  one-half  of  the 
interest  bearing  indebtedness  also  then  outstanding  and  such  interest 
as  actually  paid  on  indebtedness  wholly  secured  by  collateral  subject 
of  sale  in  the  ordinary  business  of  the  corporation. 

Interest  payments  of  this  character,  being  allowable  deductions  in 
gross  income,  will  not  be  taken  into  account  as  part  of  cost  of  manu- 
facture for  reason  that  to  consider  them  an  element  in  the  cost  of 
manufacture  and  to  deduct  them  from  gross  income  as  specific  items 
would  in  effect  result  in  a  double  deduction  of  the  amounts  involved. 

A  corporation  is  not  permitted  to  include  in  its  deduction  the  rental 
value  of  property  which  it  owns  and  occupies,  nor  is  it  permitted  to 
deduct  from  gross  income  the  interest  which  the  capital  invested  or 
employed  would  earn  if  it  were  otherwise  invested. 

It  therefore  follows  that  a  corporation  cannot  take  into  account 
as  part  of  cost  of  manufacture  any  possible  earnings  which  might  ac- 
crue on  its  capital  or  investment  had  such  capital  been  so  placed  as 
to  earn  a  given  rate  of  interest.  (T.  D.  2137.) 

Entertainment  Money:  So-called  spending  or  "treating  money"  ad- 
vanced by  corporations  to  salesmen  as  part  of  selling  expense  of 
products  is  an  allowable  deduction  in  return  of  income  by  such  cor- 
poration. There  must  be  some  showing  that  allowances  claimed  as 
deduction  were  actually  expended  for  that  purpose.  (T.  D.  2090.) 

Import  Duties:  Import  duties  or  taxes  are  not  deductible  under 
items  of  taxes  paid  during  the  year.  They  should  be  included  in  arriv- 
ing at  cost  of  goods  under  Item  4  (Expenses).  (Art.  155,  Reg.  33.) 

Permanent  Buildings  On  Leased  Ground:  The  cost  of  erecting 
permanent  building  on  ground  leased  by  company  is  a  proper  deduction 
as  a  rental  charge,  provided  such  buildings  are  left  on  ground  at  expira- 


TREASURY  DECISIONS  123 

tion  of  lease  as  a  part  of  rental  payment.  In  such  case,  cost  will  be 
pro-rated  according  to  the  number  of  years  constituting  term  of  lease, 
and  annual  deductions  made  accordingly.  (Art.  115,  Reg.  33.) 

Furniture  and  Equipment,  Renewal  of:  An  ordinary  amount  ex- 
pended by  insurance  company  for  renewal  of  office  furniture  and  equip- 
ment held  not  asset  but  an  expense  of  maintenance  which  it  is  entitled 
to  deduct  in  ascertaining  its  net  income.  (Mutual  Benefit  Life  Insur- 
ance Co.  v.  Herold,  198  F.  199.) 

Repairs:  Incidental  repairs  which  neither  add  to  the  value  of 
property  nor  appreciably  prolong  its  life,  but  keep  it  in  operating  con- 
dition, may  be  deducted  as  expenses.  (Art.  131,  Reg.  33.) 

Life  Insurance  in  Favor  of  Corporations:  In  cases  where  in  cor- 
porations paid  premium  on  insurance  policies,  insuring  in  favor  of  cor- 
porations, the  lives  of  officers  or  others,  such  premiums  may  be  allow- 
ably deducted  from  gross  income  of  corporation  paying  same. 

In  all  such  cases,  proceeds  of  policies  when  paid  at  maturity  or 
upon  death  of  insured  to  corporation  shall  be  returned  by  said  cor- 
poration as  income  for  year  in  which  proceeds  are  received.  (T.  D. 
2090.) 

Salaries  Paid  Officers  and  Employees:  Such  amounts  as  corpora- 
tions actually  pay  as  fair  and  reasonable  compensation  for  services  ren- 
dered by  officers  and  employees  constitute  allowable  deductions  from 
income.  Salaries  as  here  defined  should  not  depend  upon  profits  earned 
by  corporations,  the  presumption  being  that  these  services  rendered  are 
of  equal  value  regardless  of  the  fact  that  net  earnings  of  the  corpora- 
tion may  differ  from  year  to  year.  (Commissioner  W.  H.  Osborn, 
February  2nd,  1915.) 

Salaries  Paid  to  National  Guard  Men  While  on  Federal  Duty  Are  an 
Allowable  Expense:  In  case  a  corporation  continues  to  pay  an  em- 
ployee his  salary  or  part  thereof  during  his  service  in  the  U.  S.  Army, 
it  is  held  that  same  will  be  considered  a  necessary  expense  of  opera- 
tion of  the  business  of  the  corporation,  and  as  such  will  be  an  allowable 
deduction  in  its  return  of  annual  net  income.  (Acting  Commissioner 
J.  E.  Fletcher,  October  4th,  1916.) 

Donations  for  Welfare  of  Employees:  Donations  by  corporations 
which  legitimately  represent  the  consideration  for  benefit  going  directly 
or  indirectly  to  corporations  as  an  incident  of  its  business,  are  allow- 
able deductions  from  gross  income  in  ascertaining  net  income,  as  dona- 
tions to  hospital  upon  consideration  that  employees  of  corporation  are 
to  have  ward  for  use  in  case  of  accident  or  illness.  The  absence  of  con- 
sideration moving  in  some  form  to  corporation  will  make  donation 
mere  gratuity.  (T.  D.  2090.) 

Donations  Made  for  Purposes  Connected  with  Operation  of  Prop- 
erty Limited  to  Charitable  Institutions,  hospitals,  or  educational  insti- 
tutions, conducted  for  benefit  of  employees  of  a  corporation,  or  their 
dependents,  shall  be  proper  deductions  under  head  of  expense  in  return 
of  corporation.  (T.  D.  2090.) 

Pensions  to  Ex-Employees:  Amount  paid  for  pensions  to  retired 
employees  or  their  dependents  on  account  of  injuries  received  by  em- 
ployees are  proper  deductions  as  necessary  expenses.  (T.  D.  2090.) 

Railroads,  Deductible  and  Non-Deductible  Expenses  of:  Deduc- 
tions for  expenditures  for  addition  and  betterments  to  property,  such 
as  expenditures  for  sidings  or  spur-tracks,  are  not  authorized. 

The  payment  for  labor  and  materials  that  go  into  actual  operating 
of  road  and  property  are  deductible.  Maintenance  means  upkeep  or 
preserving  of  condition  of  property  to  be  operated,  and  does  not  mean 
addition  to  equipment  or  improvements  of  former  condition  of  road. 

Where  old  rails  are  replaced  with  new  heavier  rails,  wooden  bridges 
and  culverts  with  concrete  steel  bridges  and  culverts  the  rule  is  that 


124  TREASURY  DECISIONS 

cost  of  renewal  with  like  kind  of  quality  is  allowable,  but  excess  cost 
is  not  allowable  deduction. 

Amounts  expended  for  improving  and  adding  to  property,  such  as 
building  new  stations,  new  shops,  installing  new  machinery,  are  in- 
cluded in  income.  (T.  D.  2210.) 

Public  Utility  Under  Contract  with  State,  etc.:  In  the  case  of 
public  utility,  operated  under  contract  with  a  city,  state,  territory  or 
District  of  Columbia,  or  a  city  where  a  portion  of  net  earning  of  such 
public  utility  is  payable  under  such  contract  to  state,  territory,  etc.; 
amounts  so  paid  may  be  deducted  by  public  utility  operating  under  such 
contract  as  an  "expense  of  business."  (T.  D.  2090.) 

Taxes:  Paid  During  the  Year  Are  Deductible:  For  the  purpose  of 
claiming  as  allowable  deduction  amounts  paid  to  the  collector  and 
amounts  withheld  at  source  on  account  of  income  tax,  it  is  held  that 
amounts  of  both  classes  are  paid  within  meaning  of  the  law,  in  the  year 
in  which  assessment  is  made  and  tax  paid  to  the  collector  of  internal 
revenue.  (T.  D.  2135.) 

Taxes:  Excise  and  Franchise  Taxes  Are  Deductible:  The  ruling  of 
this  office  previously  made  to  the  effect  that  banking  corporations  are 
not  permitted  to  deduct  from  gross  income  the  amount  of  taxes  paid 
for  stockholders  on  the  value  of  their  capital  stock  outstanding,  applies 
only  to  taxes  levied  upon  value  of  the  capital  stock  and  is  not  intend- 
ed to  operate  so  as  to  prevent  banking  corporations  from  deducting 
from  their  gross  income  any  State  tax  imposed  against  the  corporation 
itself,  on  an  excise  or  franchise  tax;  that  is,  a  tax  which  corporation  is 
required  to  pay  to  the  State  in  order  that  it  may  transact  business 
within  the  State.  (T.  D.  2152.) 

Reserves  for  Taxes  Are  Not  Deductible:  Reserves  for  taxes  can- 
not be  allowed,  as  the  law  specifically  provides  that  only  such  sums 
as  are  paid  within  the  year  for  taxes  shall  be  deducted.  (Art.  156, 
Reg.  33.) 

Cost  of  Live  Stock  purchased  for  resale  is  an  allowable  deduction, 
under  item  of  expense,  but  money  expended  for  breeding  purposes  is 
regarded  as  capital  invested,  and  the  amounts  so  expended  do  not 
constitute  deductions. 

Live  Stock  purchased  for  any  purpose,  and  afterwards  dies,  and  the 
cost  thereof  has  not  been  claimed  as  an  item  of  expense,  the  actual 
purchase  price  of  such  stock  less  any  depreciation  which  may  have 
previously  been  claimed  may  be  deducted  as  loss. 

Property  Destroyed  by  order  of  a  State  or  the  United  States  may 
be  claimed  as  a  loss,  but  if  reimbursement  is  made,  in  whole  or  in  part, 
the  amount  received  shall  be  accounted  for  as  income  in  the  year  in 
which  reimbursement  is  made. 

Deductions  Allowed  to  Citizens  or  Residents:  Taxes  paid  to  the 
United  States  or  any  state  or  subdivision  thereof. 

Customs  Duties:  The  custom  duties  paid  during  the  year  by  an 
individual  are  allowable  deductions  as  taxes  or  part  of  cost  price, 
if  individual  is  engaged  in  importation  of  goods  and  merchandise.  This 
ruling  supersedes  prior  instructions  given  on  this  point.  (December 
22nd,  1914.) 

Losses  Deductible  by  Citizens  or  Residents  in  Business  or  Through 
Casualties:  Losses  arising  from  fire,  storms  or  shipwreck  not  com- 
pensated by  insurance  or  otherwise,  is  deductible. 

Business  has  been  defined;  "as  that  which  occupies  and  engages 
the  time,  attention  and  labor  of  any  one,  for  the  purpose  of  a  livelihood, 
profit  or  improvement:  that  which  is  his  personal  concern  or  interest; 
employment,  regular  occupation,  but  it  is  not  necessary  that  it  be  his 
sole  occupation." 

The  doing  of  a  single  act  not  pertaining  to  the  particular  business 


TREASURY  DECISIONS  125 

of  the  person  doing  same,  is  not  considered  as  engaging  in  business. 
"In  trade"  is  synonymous  with  business.  (T.  D.  1989.) 

Loss  to  be  deductible  must  be  actual  and  not  speculative. 

The  term  "In  trade"  as  used  in  Treasury  Decision  2005,  is  held  to 
mean  trade  or  trades  in  which  person  making  return  is  engaged;  that  is, 
in  which  he  hns  money  invested  and  to  which  he  devotes  at  least  part 
of  his  time  and  attention.  A  person  may  engage  in  more  than  one  trade 
and  may  deduct  losses  incurred  in  all  of  them  provided  that  above 
requirements  are  met.  As  to  losses  on  stocks,  grain,  cotton,  etc.,  it 
i/icurred  by  person  engaged  in  trade  to  which  buying  or  selling  of 
same  are  incident  or  a  part  of  the  business,  as  by  member  of  a  stock, 
grain  or  cotton  exchange,  such  losses  may  be  deducted.  (T.  D.  2090.) 

Neither  the  investment  by  an  individual  in  stock  of  a  company,  nor 
employment  of  him  by  company  in  any  official  capacity,  can  serve  to 
make  the  business  in  which  company  is  engaged  a  matter  of  his  indi- 
vidual business.  (T.  D.  2135.) 

Losses  Deductible  by  Citizen  or  Resident  Incurred  Outside  of 
Business:  A  loss  is  none  the  less  actual  because  an  indivicual  cannot 
divest  himself  of  the  possession  of  worthless,  stock  by  saie.  but  that 
condition  alone  does  not  give  the  loss  in  question  such  a  character  as 
appears  to  the  Department  to  have  been  contemplated  by  the  Income 
Tax  Law.  (T.  D.  2135.) 

Deductible  Loss,  Method  of  Determining  Amount  Of:  Loss  is  the 
difference  between  selling  price  and  cost  where  selling  price  is  less 
than  cost. 

Taxes:  Not  Deductible:  Taxes  paid  for  local  benefits  are  not  de- 
ductible. (Art.  153,  Reg.  33.) 

Deduction,  of  Tax  at  Source  Is  at  the  2  Per  Cent  Rate  on  All 
Taxable  Income  Paid  on  or  After  January  1st,  1917:  Under  the  act 
of  September  8th,  1916,  withholding  agents  are  required  to  withhold 
the  normal  tax  of  2  per  cent  on  all  income  subject  to  withholding  paid 
on  or  subsequent  to  January  1st,  1917,  regardless  of  the  date  on  which 
the  income  became  due  and  payable.  (Commissioner  W.  H.  Osborn, 
December  18th,  1916.) 

Organization  Expenses  Represent  the  Cost  of  the  Charter  or  Fran- 
chise  of  the  Corporation,  and  Do  Not  Constitute  an  Allowable  Deduction 
From  Gross  Income:  It  is  HELD  that  "organization  expenses"  consti- 
tute a  capital  investment,  such  expenses  being  offset  by  the  assessed 
value  of  the  corporation's  franchise,  and  intangible  assets  of  a  somewhat 
permanent  character  and  in  many  instances  of  substantial  value.  Such 
expenses  are  very  similar  in  character  to  the  discount  at  which  the  stock 
issued  by  the  company  is  being  sold,  the  only  effect  of  such  expenses  and 
discounts  being  to  reduce  the  amount  of  capital  available  for  use  and 
employment  in  the  business  of  the  corporation.  The  discount  at  which 
the  stock  is  sold  is  not  a  loss  sustained  within  the  meaning  of  the  law, 
and,  therefore,  not  deductible.  Likewise,  expenses  incident  to  and  con- 
nected with  the  incorporation  and  organization  of  the  company  are  not 
"ordinary  and  necessary  expenses  of  maintenance  and  operation,"  which 
are  the  only  "expenses  authorized  by  the  income  tax  law  to  be  deducted 
from  gross  income." 

Insurance  Companies,  Reserve  Deductible  By:  William  McCoach, 
Collector  of  Internal  Revenue,  Petitioner,  vs.  Insurance  Company  of 
North  America.  U.  S.  Supreme  Court,  June  11,  1917. 

This  was  an  action  brought  by  respondent,  a  fire  and  marine  insur- 
ance company  of  the  state  of  Pennsylvania,  to  recover  a  part  of  the 
excise  taxes  exacted  of  it  for  the  years  1910,  1911,  under  the  act  of 
August  5,  1909,  under  the  provision  of  the  laws  of  Pennsylvania  the 
respondent  is  required  to  return  each  year  as  an  item  among  their  lia- 
bilities the  net  amount  of  unpaid  losses  and  claims  whether  actually 
adjusted,  in  the  process  of  adjustment  or  resisted.  The  court  held, 


126  TREASURY  DECISIONS 

that  the  losses  in  immediate  contemplation  but  as  not  yet  actually  sus- 
tained, were  not  intended  to  be  treated  as  part  of  the  reserve  funds, 
that  term  rather  having  reference  to  the  funds  ordinarily  held  as  against 
the  contingent  liability  on  outstanding  policies.  That  such  provision  as 
hereinbefore  referred  to  was  not  meant  to  create  a  reserve  fund  and 
would  not  be  permitted  to  be  deducted  from  the  gross  income  in  making 
a  return  of  the  annual  net  income  under  the  federal  income  tax  law. 

"Head  of  Family"  Definition:  Under  Act  of  September  8th,  1916, 
head  of  family  is  entitled  to  claim  a  personal  exemption  of  $4,000 
for  the  purpose  of  normal  income  tax  (as  amended  by  the  Act  of  1917, 
$200  for  each  dependent  minor  child). 

Head  of  family  is  held  to  be  a  person  who  actually  supports  and 
maintains  one  or  more  individuals  who  are  closely  connected  with  him 
by  blood  relationship,  relationship  by  marriage  or  by  adoption,  and 
whose  right  to  exercise  family  control  and  to  provide  for  these  de- 
pendent individuals  is  based  on  some  moral  or  legal  obligation.  (T.  D. 
2427.)  January  4th,  1917. 

Depletion.  Individuals  and  Corporations  From  Whose  Prop- 
erty Oil  or  Gas  Is  Produced,  May  Deduct  From  Gross  Income  on 
Account  of  Depletion,  Such  a  Percentage  of  the  Fair  Market  Value  as  of 
March  1,  1913,  of  the  Oil  or  Gas  Properties,  if  Acquired  Prior  to  That 
Date,  or  of  the  Cost  of  Such  Properties,  if  Acquired  Subsequent  to  That 
Date,  as  the  Reduction  in  Flow  and  Production  of  the  Year  for  Which 
the  Return  Is  Made,  Is  a  Percentage  of  the  Flow  and  Production  of  the 
Previous  Year. 

The  purpose  of  Section  5,  deduction  "eight,"  and  Section  12,  deduc- 
tion "second"  of  Title  1,  Act  of  September  8th,  1916,  is  to  afford  a  means 
whereby  the  individual  or  corporation  owning  oil  or  gas  producing 
property  may,  during  the  period  of  operation,  deduct  from  gross  income 
the  cost  of,  capital  actually  invested,  in  the  natural  deposits,  if  the  invest- 
ment was  made  subsequent  to  March  1,  1913,  or  the  fair  market  value  as 
of  March  1st,  1913,  if  purchased  prior  to  that  date,  the  measure  of  deduc- 
tion being  the  reduction  in  the  flow  and  production. 

The  annual  deduction  authorized  by  the  said  provision  must  be 
reasonable  and  not  in  excess  of  such  a  percentage  of  the  cost  or  value, 
as  the  case  may  be,  and  is  herein  denned,  of  the  oil  or  gas  producing 
properties  as  indicated  by  the  reduction  in  the  original  flow  or  settled 
production  of  one  year  as  compared  with  that  of  the  preceding  year. 

For  the  purpose  of  this  deduction,  note  may  be  taken  of  the  reduc- 
tion in  flow  and  production  of  such  individual  wells  as  were  producing 
oil  or  gas  during  or  at  some  time  within  the  year,  of  groups  of  wells  or 
of  all  wells  in  the  field  or  territory  embraced  in  the  same  ownership. 
If  tested  by  the  aggregate  flow  of  all  the  wells  in  the  field  or  territory, 
embraced  in  the  same  ownership.  If  tested  by  the  aggregate  flow  of  all 
of  the  wells  in  the  field  or  territory,  owned  by  an  individual  or  corpora- 
tion and  new  wells  as  shall  have  been  developed  during  the  year,  it  is 
possible  that  at  the  end  of  the  year  there  will  have  been  no  reduction  in 
flow  and  production,  in  which  case,  under  the  specific  provision  of  the 
law  hereinbefore  alluded  to,  and  under  which  the  depletion  deduction  is 
measured  by  the  reduction  in  flow  and  production,  there  can  be  no 
deduction  for  depletion. 

Hence,  in  the  case  of  a  field  or  territory  in  which  new  wells  are 
being  drilled,  if  the  depletion  deduction  is  to  be  availed  of  in  the  return 
of  annual  net  income,  each  individual  well  or  group  of  wells  in  operation 
at  the  beginning  of,  or  brought  in  during  the  year,  if  the  flow  and  pro- 
duction of  the  group  of  wells  is  so  assembled  as  to  be  tested,  must  be 
tested  at  the  end  of  the  year  in  order  that  the  decline  in  the  flow  and 
production  may  be  determined. 

New  wells  or  new  groups  of  wells  brought  in  during  the  year  may 
be  tested  as  soon  as  they  have  reached  the  stage  of  settled  production 
or  regular  flow  and  then  again  at  the  end  of  the  year.  The  decline  in 


TREASURY  DECISIONS  127 

flow  of  production,  if  any,  as  indicated  by  these  tests,  will  be  reduced  to 
a  percentage  basis  and  a  like  percentage  of  the  capital  invested  in  the 
oil  or  gas  property  will  constitute  an  allowable  deduction  from  the  gross 
income  of  the  year  on  account  of  depletion.  Thus  if  the  decline  in  the 
flow  and  production  during  the  year  of,  say,  ten  wells  costing  $100,000. 
has  been  5  per  cent  as  compared  with  the  production  of  flow  as  indi- 
cated by  a  test  made  at  the  beginning  of  a  period,  then  5  per  cent  of 
$100,000  or  $5,000  will,  for  the  year  for  which  the  computation  is  made, 
constitute  an  allowable  depletion  deduction  in  favor  of  the  individual  or 
corporation  owning  and  operating  the  property. 

If  the  wells  are  not  so  situated  that  their  flow  and  production,  may 
be  assembled  in  order  to  test  and  ascertain  the  reduction  in  the  outfit 
as  a  basis  for  computing  the  depletion,  it  will  be  necessary  for  the 
corporation  or  individual  owning  the  property  and  claiming  a  depletion 
deduction,  to  take  an  accurate  gauge  of  the  production  and  flow  on 
each  well  at  a  certain  same  period  of  each  year,  and  by  comparing  this 
gauge  with  that  of  the  previous  year,  determine  the  percentage  by 
which  the  production  of  flow  has  been  reduced.  This  having  been  done 
as  to  all  other  wells  in  operation,  an  average  percentage  rate  in  reduc- 
tion in  flow  and  production  will  be  ascertained,  and  this  rate  will  be 
applied  to  the  capital  invested,  that  is,  the  value  of  the  oil  or  gas  prop- 
erty as  of  March  1,  1913,  or  the  cost  of  the  same,  if  acquired  subsequent 
to  that  date,  for  the  purpose  of  determining  the  amount  which  may  be 
allowably  deducted  from  gross  income  by  such  owning  indivilual  or 
corporation  on  account  of  depletion. 

In  case  of  a  field  or  territory  fully  developed  and  in  which  no  new 
wells  are  being  drilled,  a  comparison  of  the  quantity  of  oil  or  gas  pro- 
duced during  the  year  for  which  the  computation  is  made  with  the 
quantity  produced  during  the  last  preceding  year,  will  disclose  the  re- 
duction, and  the  percentage  thus  indicated  of  the  reduction  in  flow  and 
production  of  such  field,  will  be  the  measure  of  the  depletion  deduction 
to  be  taken  by  the  owner  with  respect  to  the  capital  invested  in  such 
field. 

Notwithstanding  the  fact  that  the  drilling  of  new  wells  may  offset 
the  reduction  in  the  production  and  flow  of  the  older  wells  in  the  field 
not  fully  developed,  the  said  provisions  of  the  law  does  not  authorize, 
and  this  office  cannot  permit,  a  depletion  deduction  to  be  taken  so 
long  as  the  flow  in  production  of  the  unit,  be  it  a  well  or  group  of  wells, 
or  the  entire  territory  is  as  great  during  the  year  for  which  the  return 
is  made,  as  it  was  for  the  preceding  year. 

The  depletion  deduction  in  all  cases  until  the  capital  invested  is 
extinguished,  will  be  such  a  percentage  of  the  unextinguished  capital  as 
the  reduction  in  flow  of  production  of  one  year  is  a  percentage  of  flow 
or  production  of  the  previous  year. 

Every  individual  or  corporation  entitled  to  a  deduction  for  depletion 
on  account  of  deduction  in  flow  or  production  of  oil  or  gas  shall  keep  an 
accurate  ledger  account,  in  which  shall  be  charged  the  fair  market  value 
as  of  March  1,  1913,  or  the  cost  if  the  property  is  acquired  subsequent 
to  that  date,  of  the  property  whose  value  declines  with  the  removal  of 
the  natural  deposits.  The  account  shall  be  credited  with  the  amount 
of  the  depletion  deduction  claimed  and  allowed  each  year,  to  the  end 
that  when  the  credits  to  the  account  equal  the  debits  no  further  deduc- 
tion for  depletion  with  respect  to  this  property  and  the  capital  invested 
in  it,  will  be  allowed. 

There  can  be  no  revaluation  for  the  purpose  of  this  deduction  if 
it  should  be  found  that  the  estimated  quantity  of  oil  or  gas  contained 
in  the  property  was  understated  at  the  time  the  value  was  fixed  or  at 
the  time  the  property  was  acquired. 

The  provision  of  the  law  authorizing  a  depletion  deduction,  designed 
as  it  is  to  provide  a  means  whereby  the  invested  capital  of  an  individual 
or  corporation  may  not  be  subject  to  the  tax  imposed  by  this  title,  does 
not  apply  to  individuals  or  corporations  who  are  operating  oil  or  gas 


128  TREASURY  DECISIONS 

properties  under  lease,  since  in  those  cases  the  operator  has  no  capital 
invested  in  such  property.  By  capital  invested,  as  herein  used,  is  meant 
the  fair  market  value  of  the  properties  as  of  March  1,  1913,  if  acquired 
prior  to  that  date,  on  the  actual  cost  if  acquired  subsequent  to  that 
date,  as  it  relates  to  the  owner  in  fee  of  the  properties. 

Lessees  will,  however,  be  permitted  to  deduct  from  gross  income 
each  year,  a  reasonable  allowance  for  depreciation,  which  depreciation 
applies  to  the  physical  property,  including  rigs,  tools,  machinery,  and 
other  equipment  necessary  to  the  operation  of  the  wells  or  fields.  If 
lessees  in  order  to  secure  the  right  to  enter  upon,  explore,  develop,  or 
operate  gas  or  oil  properties,  paid,  or  shall  pay  a  bonus  in  addition  to  the 
royalties  the  amount  of  such  bonus  so  paid  may  be  ratably  distributed 
over  the  life  of  the  lease  or  over  the  productive  life  of  the  property,  and 
the  lessee  may  deduct  annually  as  a  rental  payment  and  aliquot  part 
of  the  amount  of  the  bonus  so  paid,  until  such  amount  has  been  ex- 
tinguished. 

The  incidental  expenses  of  drilling  wells,  that  is,  such  expenses  as 
are  paid  through  wages,  fuel,  repairs,  etc.,  which  do  not  necessarily 
enter  into  and  form  a  part  of  the  capital  invested  or  property  account, 
may,  at  the  option  of  the  individual  or  corporation  owning  and  operating 
the  property,  be  charged  to  property  account  subject  to  depreciation,  or 
be  deducted  from  gross  income  as  an  operating  expense.  The  cost  of 
drilling  dry  or  non-productive  wells  may  be  deducted  from  the  gross 
income  as  a  loss. 

To  each  return  made  by  an  individual  or  corporation  owning 
or  operating  oil  or  gas  properties  there  should  be  attached  a  statement 
showing  first,  (a)  the  fair  market  value  of  the  property  (exclusive  of 
machinery,  equipment),  as  of  March  1,  1913,  if  acquired  prior  to  that 
date,  or  (b)  the  actual  cost  of  the  property,  if  acquired  subsequent 
to  that  date;  second,  how  the  fair  market  value  of  the  property  as  of 
March  1,  1913,  was  ascertained;  third,  the  quantity  of  oil  or  gas  pro- 
duced during  the  year  for  which  the  return  was  made;  fourth,  the 
quantity  produced"  during  the  year  immediately  preceding;  fifth,  how 
the  depletion  deduction  claimed  in  the  return  was  computed,  whether 
upon  the  decline  in  flow  and  production  of  individual  wells,  group  of 
of  wells,  or  the  entire  field;  and  sixth,  any  other  data  which  would  be 
helpful  in  determining  the  reasonableness  of  the  depletion  deduction 
claimed  in  the  return. 

If  the  operator  is  a  lessee,  that  fact  should  be  stated  and  an  ex- 
planation given  as  to  the  basis  and  property  upon  which  any  deprecia- 
tion deduction  is  claimed.  It  being  understood  as  hereinbefore  indi- 
cated that  the  depreciation  relates  to  the  loss  due  to  the  use,  wear  and 
tear  of  physical  property,  and  that  the  lessee  is  not  entitled  to  any  deduc- 
tion for  the  depletion  or  exhaustion  of  the  oil  or  gas  deposits,  but  may 
deduct  annually  as  a  rental  payment  an  aliquot  part  of  any  bonus  paid 
for  the  right  to  enter  upon,  explore,  develop  and  operate  oil  or  gas 
territory,  as  well  as  the  royalty  payments  made  to  the  lessor  for  the  oil 
or  gas  removed  from  such  property;  provided,  the  entire  proceeds  from 
the  oil  or  gas  produced  during  the  year  are  returned  in  the  gross  income 
of  the  operator.  (T.  D.  2447.) 

Depreciation:  Deduction  for  depreciation  should  be  the  estimated 
amount  of  loss  accrued  during  year  to  which  return  relates,  in  value  of 
property  in  respect  to  which  deduction  is  claimed,  that  arises  from  ex- 
haustion, wear  and  tear,  or  obsolescence  out  of  uses  to  which  property 
is  put,  and  which  losses  have  not  been  made  good  by  payments  for 
ordinary  maintenance  and  repairs  deducted  under  heading  of  expenses. 
This  estimate  should  be  formed  upon  assumed  life  of  property,  its  cost 
and  use.  Expenses  paid  in  any  one  year  making  good  exhaustion,  wear 
and  tear,  in  respect  of  which  any  deduction  for  depreciation  is  claimed, 
must  be  included  in  deduction  for  expense  of  maintenance  and  opera- 
tion of  property,  but  must  be  made  out  of  accumulated  allowance  deduc- 


TREASURY  DECISIONS  129 

tions  for   depreciation  in  current  and  previous  years.     (Art.  129,  Reg. 
33.) 

Depreciation  Allowance,  To  Be  Deductible,  must  be,  as  nearly  as 
possible,  the  measure  of  loss  due  to  wear  and  tear,  and  should  be  so 
entered  on  books  as  to  constitute  a  liability  against  assets  of  company. 
Annual  allowance  deductible  on  this  account  should  be  in  such  an 
amount  as  that  the  aggregate  of  annual  allowances  deducted  during  the 
life  of  property  with  respect  to  which  it  is  claimed  will  not,  when  prop- 
erty is  worn  out,  exceed  its  original  cost.  (Art.  130,  Reg.  33.) 

A  reasonable  allowance  for  depreciation  must  be  determined  on 
basis  of  cost  of  property  and  probable  number  of  years  constituting  its 
life.  In  other  words,  the  amount  of  allowable  depreciation  deduction 
thus  ascertained  will  be  credited  to  a  depreciation  reserve  account, 
against  which  account  will  be  charged  the  cost  of  renewing  or  replac- 
ing the  property  with  respect  to  which  depreciation  is  claimed. 

It  is  not  contemplated  that  such  ordinary  incidental  repairs  as 
keep  property  in  operating  condition  shall  be  charged  to  this  deprecia- 
tion reserve,  but  such  cost  may  be  charged  to  expense  of  operation 
and  maintenance. 

This  office  recognizes  the  fact  that  a  building,  or  a  piece  of  machin- 
ery or  other  equipment,  as  a  whole,  may  deteriorate  in  value  and  useful- 
ness by  reason  of  wear  and  tear,  regardless  of  the  fact  that  certain  minor 
component  parts  may  be  replaced.  The  depreciation  deduction  author- 
ized by  law  therefore  contemplates  the  creation  of  a  fund  that  will 
renew  original  property  when  it  has  been  worn  out  or  exhausted,  regard- 
less of  restoration  of  parts  that  may  have  been  made  in  the  meantime. 

Hence  it  is  held  that  in  addition  to  depreciation  deduction  intended 
to  cover  cost  of  property  as  a  whole,  expenses  of  incidental  repairs  will 
not  add  to  the  value  of  property,  but  merely  keep  it  in  operating  condi- 
tion, may  be  allowably  deducted  from  gross  income  of  expense  of  opera- 
tion. 

It  is  barely  possible  in  some  instances  that  worn  out  parts  of  a 
machine  or  similar  equipment  may  be  renewed  one  after  another  until 
original  machine  is  swallowed  up  in  new  parts  and  said  equipment  is 
then  in  as  good  operative  condition  as  it  originally  was.  In  this  case 
if  cost  of  renewal  of  parts  was  charged  to  operative  expense  no  deduc- 
tion on  the  part  of  depreciation  should  be  claimed  or  allowed  as  to 
such  equipment. 

This  would  appear  to  be  true  in  case  of  pipe-lines,  worn  out  pipe 
coverings  and  similar  articles  of  equipment.  By  replacing  one  joint  of 
pipe  after  another,  all  may  be  replaced,  and  if  expenses  which  are 
deducted  are  as  operating  expenses,  any  depreciation  fund  that  may 
have  been  reserved  will  remain  unused.  So  in  cases  of  this  kind,  if 
depreciation  reserve  is  set  up  to  cover  property  that  may  be  renewed 
or  restored  until  whole  is  renewed,  the  cost  of  renewal  of  parts  should 
be  charged  to  depreciation  reserve  funds,  and  will  not  be  considered 
incidental  expenses  within  the  meaning  of  the  regulations.  (Art.  131, 
Reg.  33.) 

Incidental  repairs,  as  used  in  regulation  cited,  refers  only  to  those 
repairs  which,  as  the  term  signifies,  only  incidental  to  the  operation  of 
property,  and  which  will  not,  if  continued  as  component  parts  wear 
out,  and  are  restored,  make  permanent  the  property. 

Hence,  depreciation  deduction  allowable  in  respect  to  any  property 
is  such  an  amount  as  in  the  aggregate,  when  property  as  a  whole  is 
worn  out,  will  replace  or  return  to  corporation  capital  invested  in  it. 
That  is  to  say,  the  depreciation  deduction  allowable  under  the  law  and 
regulations  should  be  only  such  an  amount  as  will  take  care  of  loss  due 
to  general  wear  and  tear,  which  to  no  extent  is  compensated  by  re- 
pairs. 

The  rules  of  this  office  contemplate  that  annual  deduction  for  depre- 
ciation may  be  made  to  provide  for  wear  and  tear,  the  amount  of  such 


130  TREASURY  DECISIONS 

deduction  to  be  determined  upon  the  basis  of  the  probable  life  of  the 
property.  If  it  shall  occur  that  a  property  becomes  obsolete  or  worth- 
less before  its  estimated  probable  life  shall  have  expired,  a  deduction 
representing  the  difference  between  the  cost  of  the  property  and  the 
amount  previously  charged  on  account  of  depreciation  may  be  deducted 
as  a  loss.  (Commissioner  W.  H.  Osborn,  September  19,  1916.) 

Revenue  Officers  and  Examining  Agents  in  the  examination  of  books 
of  a  corporation  will,  therefore,  determine  whether  or  not  deduction 
claimed  in  their  return  is  a  fair  and  reasonable  measure  of  loss  sustained 
during  the  year,  and  if  they  find  that  amount  claimed  in  their  return 
is  a  fair  and  reasonable  measure  of  the  loss,  and  that  it  is  not  written  off 
on  the  books  of  the  company,  they  will  permit  the  corporation  to  open 
its  books,  if  it  so  desires,  and  make  such  entries  as  will  constitute  amount 
sought  to  be  deducted,  a  liability  against  the  assets  of  the  Company 
and  charged  against  the  income  in  the  year  in  which  return  is  made. 
Sufficient  time  to  make  such  correcting  entries  should  be  given  to  the 
corporation  before  report  of  examination  is  made  to  this  office,  and  any 
recommendation  as  to  additional  taxes  should  be  made  accordingly. 

If  Corporation  refuses  or  neglects  to  reopen  its  books  and  write 
out  depreciation  claimed  in  return,  or  a  reasonable  amount  measuring 
loss  sustained  on  this  account,  amount  claimed  in  return  will  be  disal- 
lowed. The  correcting  entries  for  each  year,  if  made,  must  be  such  as 
would  have  been  made  had  they  been  made  at  time  books  were  closed. 

The  foregoing  instructions  do  not  contemplate  that  a  depreciation 
deduction  claimed  is  to  be  allowed  in  every  case  simply  because  written 
off.  If  upon  examination,  taking  into  account  perishable  property  and 
use  it  is  put  to,  it  appears  that  amount  written  off  is  in  excess  of  rea- 
sonable allowance,  the  excess  should  be  disallowed. 

When  amount  claimed  for  depreciation  has  been  written  off  on 
books  of  Company,  either  prior  or  subsequent  to  making  of  the  return, 
it  remains  for  Revenue  agent  and  examining  officers  to  determine  whether 
or  not  this  amount  is  such  as  is  contemplated  by  meaning  of  the  law, 
as  constituting  an  allowable  deduction,  and  if  it  does,  it  should  be 
allowed  and  report  made  accordingly.  (Letter  to  Collectors,  August 
27,  1914.) 

Depreciation;  No  Fixed  Percentages  for  Computing:  This  office  has 
no  fixed  definite  rate  by  which  an  allowable  deduction  on  account  of 
depreciation  in  value  of  any  class  of  property  subject  to  wear  and  tear 
is  to  be  computed. 

The  rule  which  is  generally  followed  by  Corporations  contemplates 
an  allowable  depreciation  deduction  within  meaning  of  Federal  Income 
Tax  Law  shall  be  computed  on  basis  of  the  cost  of  property,  and  prob- 
able number  of  years  constituting  its  life.  (T.  D.  2152.) 

Real  Estate;  Depreciation  of  and  Buildings  Thereon:  The  Federal 
Income  Tax  Law  specifically  provides  that  in  making  the  return  of  an- 
nual net  income,  corporations  may  deduct,  among  other  items,  all  losses 
actually  sustained  within  year  and  not  compensated  by  insurance,  or 
otherwise,  including  a  reasonable  allowance  for  depreciation  by  use, 
wear  and  tear  of  the  same. 

Under  this  provision  of  the  law  assets  of  any  character  which  are 
not  affected  by  wear  and  tear,  are  not  subject  to  depreciation  authorized 
by  the  act.  Real  estate  as  such,  and  as  distinct  from  improvements 
thereon,  is  not  reduced  in  value  by  reason  of  wear  and  tear,  and  it, 
therefore,  follows  that  said  allowance  in  the  case  of  real  estate  does  not 
apply  to  the  grounds,  but  is  intended  to  measure  improvements  which 
decline  in  value  is  due  to  wear  and  tear  of  same.  In  determining  cost 
of  real  estate,  in  most  cases  no  segregation  is  made  of  cost  of  build- 
ings as  separate  and  distinct  from  cost  of  grounds  upon  which  said 
buildings  stand.  In  such  cases,  where  actual  cost  of  buildings  or  im- 
provements at  time  they  were  taken  over  by  the  corporation  cannot 
be  definitely  determined,  it  will  be  sufficient  for  purpose  of  determin- 


TREASURY  DECISIONS  131 

ing  depreciation  to  be  used  in  computing  amount  which  will  be  deducti- 
ble from  gross  income  to  estimate  the  actual  value  of  the  buildings  or 
improvements  as  of  January  1st,  1909,  provided  the  buildings  were  in 
existence  at  that  time,  and  provided  that  value  placed  upon  such  build- 
ings shall  not  be  in  excess  of  the  cost  of  such  buildings,  less  an  amount 
measuring  depreciation  sustained.  (T.  D.  2137.) 

Depreciation  in  Book  Values:  Depreciation  applies  only  to  such 
tangible  property  as  is  subject  to  wear  and  tear,  and  is  not  to  be  con- 
strued as  recognizing  any  gain  or  loss  due  to  fluctuations  in  market 
values  or  arbitrary  changes  in  book  value  of  securities  and  like  assets, 
the  gain  or  loss  with  respect  to  which  will  be  determined  only  when 
such  assets  mature  or  are  sold  or  disposed  of.  (T.  D.  2077.) 

Bonds  and  securities  are  not  subject  to  wear  and  tear  within  mean- 
ing of  Federal  Income  Tax  Law,  and  therefore  this  depreciation  does  not 
apply  to  any  shrinking  in  their  value.  Shrinkage  in  value  of  securities 
does  not  constitute  a  loss  actually  sustained  within  the  year.  A  shrink- 
age in  the  value  of  bonds  or  like  securities  does  not  constitute  deduc- 
tions from  gross  income  either  as  a  loss  or  other  depreciation. 

The  fact  that  bonds  and  similar  securities  were  written  up  at  direc- 
tion of  the  Comptroller  of  the  Currency  or  State  Banking  Department 
is  not  material.  A  mere  book  entry  does  not  constitute  either  a  loss  or 
gain  for  purpose  of  Income  Tax  Law.  The  fact  bonds  were  written  off 
does  not  imply  that  they  are  a  total  loss,  nor  is  this  conclusive  proof 
that  any  loss  occurred  during  the  year  for  which  return  is  made. 

Losses  of  this  character  are  only  ascertainable  when  securities 
mature,  are  disposed  of  or  cancelled.  (T.  D.  2152.) 

District  irrigation  bonds,  as  a  rule,  if  not  always,  are  a  lien  upon 
real  estate  affected  by  irrigation  projects,  and  until  corporation  has  taken 
such  steps  as  are  necessary  to  protect  its  rights  and  force  collection  of 
bonds,  it  will  not  be  warranted  in  writing  out  of  its  assets  and  deduct- 
ing as  a  loss  the  face  value,  or  any  other  arbitrarily  ascertained  amount 
representing  such  loss  in  value  of  such  bonds  from  its  taxable  income. 
(T.  D.  2152.) 

Depreciation  Reserve  Fund,  Investing  of:  The  investment  of  de- 
preciation reserve  funds  in  the  concern's  own  plant  in  the  way  of  addi- 
tions and  extensions  appear  to  be  such  a  diversion  of  the  funds  as  is 
contemplated  by  Arts.  132  and  133  of  Reg.  33,  and  T.  D.  1943. 

Investment  in  additions  and  extensions  are  primarily  capital  invest- 
ments, and  the  fact  that  corporation  is  investing  its  depreciation  fund 
in  such  improvements  would  seem  to  indicate  that  amounts  set  aside 
on  account  of  depreciation  were  in  excess  of  a  reasonable  allowance 
which  the  law  contemplates.  A  corporation  may  deduct  from  its  gross 
income,  and  when  it  shall  appear  by  reason  of  the  investing  of  its  depre- 
ciation fund  as  set  forth,  it  actually  adds  to  the  value  of  the  capital  assets 
it  will  be  insisted  upon  that  the  amount  by  which  assets  are  increased 
on  this  account  shall  be  returned  as  income  and  subject  to  tax.  (T.  D. 
2137.) 

Depreciation  of  Good  Will:  Good  will  represents  the  value  attached 
to  a  business  over  and  above  value  of  physical  property,  and  is  such  an 
entirely  intangible  asset  that  no  claim  for  depreciation  in  connection 
therewith  can  be  allowed.  (Art  136,  Reg.  133.) 

Good  will  does  not  represent  a  value  attaching  to  physical  property, 
but  is  an  intangible  asset,  whose  value  separate  and  apart  from  business 
with  which  it  is  connected  is  not  capable  of  determination.  For  purpose 
of  income  tax  it  is  capable  of  neither  appreciation  nor  depreciation. 
Hence  an  amount  claimed  to  represent  its  decline  in  value  is  not  an 
allowable  deduction  from  gross  income  in  computing  tax  liability. 

Depreciation  of  Patents:  An  allowance  for  depreciation  of  patents 
will  be  made  on  the  following  basis:  Deduction  claimed  for  exhaustion 
of  capital  assets  as  represented  by  patents  to  be  made  in  return  of  annual 
net  income  of  the  corporation  for  any  given  year  shall  be  one-seven- 


132  TREASURY  DECISIONS 

teenth  of  the  actual  cost  of  such  patents  reduced  to  a  cash  basis.  Where 
patent  has  been  secured  from  Government  by  corporation  itself,  its  cost 
would  be  represented  by  various  government  fees,  cost  of  drawings, 
experimental  models,  attorney's  fees,  etc.  Where  patent  has  been  pur- 
chased by  the  corporation  for  a  cash  consideration,  the  amount  will 
represent  the  cost.  If  corporation  has  purchased  a  patent  and  made 
payment  in  stock  or  other  securities,  the  actual  cash  value  of  such  stock 
or  other  securities  at  time  of  purchase  will  represent  cost  of  patent  to 
corporation.  (Art.  137,  Reg.  33.) 

With  respect  to  depreciation  of  patents,  one-seventeenth  of  the  cost 
is  allowable  as  a  proper  deduction  each  year  until  the  cost  of  the  patent 
has  been  returned  to  the  corporation.  Where  the  value  of  the  patent  has 
disappeared  through  obsolescence,  or  any  other  cause,  and  the  fact  has 
been  established  that  the  patent  is  valueless,  the  unreturned  cash  invest- 
ment remaining  in  the  patent  may  be  claimed  as  a  total  loss  from  gross 
income,  in  the  return  of  annual  income  for  the  year  during  which  the 
fact  as  to  loss  shall  be  established,  such  unreturned  cash  value  to  be 
fixed  in  accordance  with  the  proportion,  that  number  of  years  which 
patent  still  has  to  run  bears  to  full  period  of  seventeen  years.  (Art  138, 
Reg.  33.) 

Patents,  Computation  of  Depreciation  of:  In  the  case  of  a  patent 
which  at  the  time  of  its  purchase  by  the  corporation  had  to  run  it  will 
be  proper  for  the  corporation  to  deduct  each  year  from  its  gross  income 
one-tenth  of  the  actual  cost  of  such  patent.  The  regulation  in  relation 
to  this  subject  contemplates  the  actual  cost  of  assets  with  respect  to 
which  depreciation  is  claimed  shall  be  ratably  distributed  over  the  num- 
ber of  years  constitutes  the  life  of  the  asset  or  the  number  of  years 
of  its  life  remaining  at  the  date  of  purchase  as  the  case  may  be.  (Act- 
ing Commissioner  David  A.  Gates,  September  24,  1916.) 

Depreciation  of  Timber  Lands:  Corporations  holding  tracts  of 
timber  lands  and  removing  therefrom  and  selling,  or  otherwise  disposing 
of  the  timber,  will  be  permitted  to  deduct  from  their  gross  income  on 
account  of  depreciation  or  depletion  an  amount  representing  the  original 
cost  of  such  timber,  plus  any  carrying  charges  that  may  have  been  cap- 
italized or  not  deducted  from  income.  The  purpose  of  depreciation 
deduction  is  to  secure  to  the  corporation,  when  timber  has  been  ex- 
hausted,  an  aggregate  amount  which,  plus  the  salvage  value  of  land, 
equal  to  capital  actually  invested  in  such  timber  land.  (Art.  139,  Reg.  33.) 

When  an  amount  sufficient  to  return  this  capital  has  been  secured 
through  annual  depreciation  deductions,  no  further  deduction  on  this 
account  shall  be  allowed.  For  the  purpose  of  increasing  the  deduction 
on  this  account  no  arbitrary  increase  in  value  shall  be  made,  unless  such 
increase  in  value  shall  be  returned  as  income  for  the  year  in  which, 
increase  in  value  was  taken  upon  books.  (Art.  140,  Reg.  33.) 

The  difference  between  original  cost  of  property,  and  its  increased 
fair  market  value  at  the  time  of  incidence  of  tax,  may  be  properly  added 
to  the  original  cost  in  determining  the  amount  to  be  deducted  on  account 
of  depreciation  of  property,  or  for  the  restoration  of  capital  in  computing 
net  income  from  sale  of  such  property.  (E.  J.  Doyle,  collector,  v. 
Mitchell  Brothers  Company,  235  Fed.  686.) 

Dividends  Received  From  Holding  Company  Declared  From  Funds 
Acquired  as  Dividends  From  Operating  Company,  Declared  From 
Funds  Acquired  Prior  to  March  1,  1913:  If  an  operating  company  distrib- 
utes the  earnings  or  profits  which  accrued  to  it  prior  to  March  1,  1913,  the 
amount  so  distributed  will  not  be  subject  to  income  tax  as  a  dividend 
in  the  hands  of  the  holding  corporation;  but,  as  a  dividend  so  received 
by  the  holding  corporation  represents  net  earnings  or  profits  accrued 
to  it  after  March  1,  1913,  the  dividends  of  the  holding  corporation  paid 
from  these  earnings  are  taxable,  in  the  hands  of  its  shareholders  when 
distributed  to  them.  The  tax  liability  for  dividends  of  the  shareholders 
of  each  corporation  is  confined  to  the  relations  under  which  the  re- 


TREASURY  DECISIONS  133 

spective  stockholders  shared  dividends,  regardless  of  the  source  from 
which  the  immediate  corporation  received  them.  (Deputy  Commis- 
sioner L.  F.  Speer,  July  23,  1917.) 

Dividends  Paid  Out  of  Amount  Set  Aside  to  Cover  Depreciation  and 
Depletion  Constitute  Taxable  Income  to  the  Stockholder  Receiving 
Them:  Referring  to  the  practice  of  certain  corporations  of  declaring 
dividends  out  of  reserves  set  aside  to  meet  depreciation  and  depletion 
of  property,  and  of  advising  stockholders  that  such  dividends  represent 
a  distribution  of  capital  assets  attention  is  directed  to  the  ruling  made 
herein  as  follows: 

All  such  dividends  received  by  stockholders  declared  out  of  such 
reserves  accumulated  subsequent  to  March  1,  1913,  constitute  income 
to  the  stockholder  under  the  Act  of  September  $,  1916,  and  must  be 
accounted  for  in  the  returns  of  net  income. 

A  stockholder's  investment  is  in  the  stock  of  a  corporation.  If  he 
disposes  of  his  stock  for  more  than  its  fair  market  value  on  March  1, 
1913,  or  its  cost  if  acquired  since  that  date,  the  profit  realized  must 
be  returned  as  income;  if  he  disposes  of  it  at  a  loss,  the  loss  sustained 
is  deductible  from  gross  income  within  the  limits  of  the  taxing  act.  In 
computing  the  profit  or  loss  sustained  there  must  be  taken  into  account 
dividends  paid  from  reserves  accumulated  prior  to  March  1,  1913,  which 
were  not  returned  as  income  for  the  year  in  which  received.  Under  the 
provisions  of  the  Act  of  September  8,  1916. 

All  rulings  in  conflict  herewith  are  hereby  revoked.     (T.  D.  2540.) 

Dividends  Declared  and  Paid  by  Subsidiary  Taxable  to  Parent  Cor- 
poration When  Received:  Southern  Pacific  Co.  v.  Lowe,  U.  S.  District 
Court,  N.  Y.,  238  Fed.  847. 

The  Central  Pacific  Co.  is  a  subsidiary  of  the  Southern  Pacific  Co. 
The  latter  has  owned  all  tlie  stock  of  the  former  ever  since  its  incorpora- 
tion. The  subsidiary  kept  no  bank  account,  but  its  earnings  were  de- 
posited with  the  bank  accounts  of  the  Southern  Pacific,  which  advanced 
the  necessary  funds,  whenever  needed  by  subsidiary,  for  any  operations 
or  expenses,  or  for  additions  or  betterments. 

In  January,  1914,  certain  dividends  were  paid  by  the  subsidiary  to 
the  Southern  Pacific,  on  which  the  government  demanded  a  tax. 

The  Southern  Pacific  contended  that  since  it  completely  owned  and 
controlled  the  subsidiary,  and  the  money  was  in  its  actual  possession  at 
all  times,  it  was  neither  richer  nor  poorer,  by  the  declaration  and  the 
payment  of  these  dividends;  that  the  dividends  were  not  earned  during 
the  period  of  taxation,  and  that  they  were  paid  from  surplus  resulting 
from  the  operations  of  the  subsidiary  prior  to  July  1st,  1909.  The  court 
HELD: 

That  the  dividends  declared  by  the  subsidiary,  although  the  funds 
representing  the  same  were  in  the  possession  of  the  Southern  Pacific 
at  all  times,  it  did  not  become  legally  entitled  to  the  earnings  of  the 
subsidiary  until  the  dividends  were  declared  in  1914.  (2)  Although  the 
money  distributed  as  dividends  in  1914  accrued  to  the  subsidiary  prior 
to  its  fiscal  year  beginning  July  1st,  1909,  it  represents  earnings  and  not 
an  increase  in  the  value  of  capital  assets,  and  the  dividends  are  taxable 
to  the  recipient  when  received  in  1914. 

Dividends  Paid  by  a  Lessee,  as  a  Rental  Equivalent,  Direct  to  Share- 
holders of  a  Corporation  Leasing  Its  Properties  to  Another,  Constitute 
Income  to  the  Lessor  Corporation:  Rensselaer  &  Saratoga  R.  R.  Co. 
vs.  Irwin,  Collector,  239  Fed.  739,  March  5,  1917. 

The  petitioner  leased  its  property  to  the  Delaware  &  Hudson  Com- 
pany which  agreed  the  interest  upon  and  discharge  the  bonds  issued 
by  the  former,  to  maintain  the  right  of  way  and  building,  and  to  pay 
direct  to  each  stockholder  dividends  at  the  rate  of  8  per  cent  per 
annum  on  each  share  of  stock.  The  lessor  received  $1,000  per  annum 
from  the  lessee  to  enable  it  to  maintain  its  corporate  existence.  The 
lessor  maintained  that  the  dividend  payments  to  its  stockholders  were 


134  TREASURY  DECISIONS 

not  income  to  it,  and  paid  income  tax  assessed  thereon  by  the  collector 
under  protest.  The  court  held  upon  a  demurrer  that  the  moneys  paid 
by  the  Delaware  &  Hudson  Canal  Company  to  the  petitioner  are  rents 
or  compensation  to  said  company  for  the  use  and  occupation  of  its 
property,  and  as  the  plaintiff  corporation  pays  no  operating  or  repairing 
expenses,  constitutes  aside  from  the  interest  paid  net,  net  income  within 
the  meaning  of  the  law  in  question.  It  is  immaterial  so  far  as  that 
question  is  concerned  that  such  dividends  are  fixed  as  to  the  amount 
by  the  lease  and  by  its  terms  paid  directly  to  such  stockholders. 

It  is  also  immaterial  that  the  plaintiff  corporation  is  not  possessed 
of  money  or  other  cash  revenues  with  which  to  pay  the  tax.  It  has 
power  to  borrow. 

The  corporation  could  not  exonerate  itself  for  liability  for  this  tax 
subsequently  imposed  under  a  law  thereafter  enacted  by  making  a  lease 
of  its  property  which  provides  for  the  payment  of  all  its  surplus  reve- 
nues directly  to  its  stockholders. 

Dividends  Received  by  Stockholder  from  1913  Paid  from  Surplus 
Earned  Prior  to  January  1,  1913,  Constitutes  Income  to  the  Stockholder. 
Gulf  Oil  Corporation  vs.  C.  G.  Lewellyn,  Collector.  C.  G.  Lewellyn  vs. 
Gulf  Oil  Corporation.  United  States  Circuit  Court  of  Appeals,  Third 
Circuit,  March  Term,  1917.  242  Fed,  709. 

For  a  number  of  years  the  corporation  has  owned  all  the  stock 
(except  directors'  shares)  of  five  subsidiaries,  and  it  owned  this  stock 
while  the  subsidiaries  were  accumulating  the  earnings  which  were  after- 
wards transferred  to  the  corporation  in  the  form  of  dividends.  The 
previous  earnings  had  been  used  from  time  to  time  in  carrying  on,  ex- 
tending and  developing  the  several  enterprises  in  which  they  were  en- 
gaged and  the  earnings  were  properly  employed  for  these  purposes.  In 
January,  1913,  the  corporation  decided  to  have  these  earnings  transferred 
to  itself,  and  thereupon  the  subsidiaries  each  and  every  one  of  them 
declared  dividends. 

The  corporation  made  a  return  to  the  government  of  its  income  for 
1913,  certifying  that  the  return  did  not  include  the  dividends  referred  to, 
and  giving  as  a  reason  that  they  have  been  declared  and  paid  out  of 
earnings  and  surplus  that  had  accrued  before  January  1,  1913.  The 
collector,  however,  demanded  a  total  tax  of  $114,244.40  from  the  cor- 
poration for  the  year  1913,  basing  the  assessment  solely  on  the  receipt 
of  these  dividends.  This  action  was  brought  to  recover  the  payment 
made  under  protest  as  assessed. 

The  court  held  that  whether  a  distribution  of  corporate  property 
is  to  be  regarded  as  a  dividend  or  not,  does  not  depend  upon  the  status 
of  the  person  who  receives  a  share,  but  on  what  is  done  by  the  dis- 
tributor. In  the  first  instance  the  money  of  the  property  is  owned  by  the 
distributor  and  as  owner  he  has  the  power  to  decide  what  is  to  become 
of  it.  After  the  stockholder  receives  it  he  may  use  it  as  he  likes,  but  it 
comes  into  his  hands  as  a  dividend  whether  he  be  an  individual  or  a 
chartered  company.  We  conclude,  therefore,  that  the  Gulf  Oil  Cor- 
poration received  the  property  in  question  in  the  character  of  a  separate 
stockholder  in  the  subsidiaries  and  received  it  as  a  dividend.  And  as 
such  as  taxable  income  under  the  income  tax  law. 

Co-operative  Dairies  and  Like  Organizations:  Co-operation  dairies, 
no  matter  how  organized,  do  not  appear  to  fall  within  the  exempt  class, 
and  therefore  are  required  to  make  returns. 

In  preparing  returns,  such  dairies  may  include  in  their  reductions 
from  gross  income  amount  actually  paid  to  members  and  patrons  for 
milk,  but  any  amount  retained  at  end  of  the  year  over  and  above  expen- 
ditures will  be  returned  as  net  income  upon  which  tax  shall  be  paid. 

Insofar  as  article  92  is  in  conflict  with  this  ruling,  it  is  hereby  re- 
voked. (T.  D.  1996.) 

Exemption  From  Income  Tax  of  Corporation  Dividends  Paid  in  the 
Form  of  Liberty  Bonds:  The  Attorney-General  holds  that  the  stock- 


TREASURY  DECISIONS  135 

p 

holders  of  a  corporation  receiving  dividends  declared  payable  and  dis- 
tributable in  bonds  issued  under  the  Act  of  Congress,  approved  April 
24,  1917,  come  within  the  Income  Tax  Law  and  are  taxable. 

2.  That  corporations  owning  these  bonds  to  that  extent  are 
exempt  from  excise  taxes,  franchise  taxes,  and  other  corportaion  taxes 
of  the  United  States  and  of  the  several  States.  (T.  D.  2512.) 

Application  of  Exemption  When  Several  Members  of  the  Family 
Invest  in  New  Liberty  Bonds:  Husband  and  wife  each  owning  in  own 
right  liberty  loan  bonds  and  certificates  not  exceeding  $5,000  each  en- 
titled to  exemption  provided  by  Section  7  (b)  Loan  Act.  Minor  children 
having  separate  estates  each  entitled  to  same  exemption.  (Secretary  of 
the  Treasury,  O.  T.  Crosby,  October  8,  1917.) 

Specific  Exemption  of  $200  for  Each  Child  Applicable  to  Both  2 
Per  Cent  Normal  Taxes:  Exemption  of  $200  for  each  child.  An  addi- 
tional exemption  of  $200  for  each  child.  An  additional  exemption  of 
$200  provided  for  by  the  act  for  each  child  applies  to  the  normal  tax 
of  2  per  cent  imposed  by  the  Act  of  September  8,  1916,  and  to  the 
additional  normal  tax  of  2  per  cent  imposed  by  the  Act  of  October  3, 
1917.  (T.  D.  2547.) 

Specific  Exemption:.  In  Hymen  Cohen  v.  John  Z.  Lowe,  Jr., 
Collector  of  Internal  Revenue,  Southern  District  of  New  York, 
on  July  18th,  1916,  234  Fed.  174.  Court  HELD  that  before  assess- 
ing additional  tax  on  excessive  net  income  over  twenty  thousand 
($20,000.00)  dollars,  an  exemption  of  three  thousand  ($3,000.00)  dollars 
should  not  be  allowed,  as  in  the  case  of  the  normal  tax. 

Interest  on  United  States  Bonds  or  Bonds  of  State  or  Political 
Subdivision,  Is  Exempt:  Income  derived  from  the  interest  upon  obli- 
gation of  a  state,  any  subdivision  thereof,  or  the  United  States,  should 
not  be  included  in  return  as  gross  income. 

Where  municipality  purchases  a  public  utility  subject  to  a  mort- 
gage, mortgage  retains  original  character,  although  municipality  as- 
sumes the  burden  of  the  indebtedness.  (T.  D.  2090.) 

Income  derived  from  interest  upon  the  obligation  of  a  state,  county 
or  city  or  any  other  political  subdivision  thereof,  or  of  the  United  States 
or  its  possessions,  is  not  subject  to  the  income  tax,  and  therefore  a  cer- 
tificate of  ownership  in  connection  with  the  coupons  or  registered  in- 
terest orders  for  such  interest  will  not  be  required. 

Coupons  should  clearly  show  on  their  face  whether  they  are  issued 
by  the  United  States  or  any  political  subdivision  therof.  If  they  do  not 
clearly  show  this,  then  ownership  certificates  should  be  required.  (T.  D. 
1892.) 

"Political  Subdivision"  of  State:  The  term  "Political  Subdivision" 
includes  such  special  assessment  districts  created  by  proper  authority 
of  the  state,  acting  within  its  constitutional  rights,  for  the  purpose  of 
carrying  out  portions  of  those  functions  of  the  state  which  by  long 
usage  and  inherent  necessities  of  government  have  always  been  regarded 
as  public. 

Levy  and  school  districts  are  held  to  be  subdivisions  of  a  state, 
within  the  meaning  of  the  income  tax  law.  (T.  D.  1946.) 

Expenses  Incurred  in  Earning  Non-Taxable  Incomes:  Such  ex- 
pense is  not  an  allowable  deduction  in  computing  net  income  from 
other  sources  taxable  under  the  law. 

Exemption  May  Be  Pro  Rated  Between  Husband  and  Wife :  Specific 
exemption  may  be  claimed  in  return  of  either  husband  or  wife,  th« 
other  claiming  no  exemption;  or  may  be  pro  rated  between  the  two. 
(T.  D.  2137.) 

Exemptions,  Miscellaneous  Income:  When  rental  payments  in 
excess  of  three  thousand  dollars  ($3,000.00)  per  year  payable  to  fiduciary, 
who  fails  or  refuses  to  file  Form  1063,  beneficiaries,  are  not  entitled  to 
file  exemption  certificates  directly.  If  fiduciary  certificate  is  not  filed, 


136  TREASURY  DECISIONS 

the  lessee  should  withhold  1  (one)  per  cent  on  entire  amount.     Lessee 
not  presumed  to  have  knowledge  of  beneficiaries  unless  parties  to  lease. 

Property,  Expenses  Of:  Landlord  may  claim  deductions  on  account 
of  any  expense  incurred  in  the  maintenance  of  the  property,  and  a 
reasonable  allowance  for  depreciation,  but  no  claim  for  depreciation 
should  be  made  on  account  of  any  expense  incurred  for  making  good 
exhaustion  for  which  a  deduction  is  claimed  elsewhere  in  the  return. 

Depreciation  as  an  allowable  deduction  is  distinct  from  loss  and 
should  not  be  confused  with  same.  Depreciation,  as  considered  in 
income  tax  law,  does  not  relate  to  any  shrinkage  in  the  value  of  bonds, 
stocks,  and  like  securities,  due  to  fluctuation  in  their  market  value,  and 
not  deductible  as  depreciation  and  loss. 

Losses  must  be  sustained  on  personal  or  real  property,  not  a 
speculative  or  a  fluctuating  valuation  of  continuing  investment,  but  an 
actual  loss  sustained  upon  a  completed  transaction.  (T.  D.  2005.) 

Book  values  which  reflect  the  shrinkage  in  value  of  assets  are  not 
bases  for  determining  taxable  income.  (T.  D.  2090.) 

Depreciation  Deductible  by  Citizens  or  Residents:  Depreciation 
of  farm  buildings  other  than  dwelling  occupied  by  owner  actually  sus- 
tained wtihin  the  year  in  excess  of  repairs  made  will  be  considered 
allowable  deduction.  (T.  D.  2090.) 

Oil,  Gas  Wells  and  Mines,  Depletion  of:  In  addition  to  the  deduc- 
tion to  measure  the  loss  due  to  depletion,  corporations  will  be  allowed 
the  usual  depreciation  of  its  machinery  and  equipment,  etc.;  such  depre- 
ciation shall  be  determined  on  basis  on  the  cost  and  estimated  life  of 
property  with  respect  to  which  depreciation  is  claimed.  (Art.  143, 
Reg.  33.) 

Corporations  leasing  oil  or  gas  territory  shall  base  their  depletion 
deductions  upon  cost  of  lease,  and  not  upon  estimated  value,  in  place, 
of  oil  or  gas.  (Art.  144,  Reg.  33.) 

Corporations  operating  mines  (including  oil  or  gas  wells)  upon  a 
royalty  basis  only  cannot  claim  depreciation  because  of  exhaustion  of 
deposits.  (Art.  145,  Reg.  33.) 

Depletion,  Recording  on  Books  for  Purpose  of  Deduction:  In  the 
opinion  of  this  office  journal  entry,  showing  the  charge  to  depletion  for 
income  tax  purposes  only,  will  not  be  sufficient. 

Corporations  should  make  a  general  ledger  entry  of  the  depletion 
charged  off,  and  the  amount  so  charged  should  be  reflected  in  the  annual 
balances  and  in  the  report  to  the  stockholders.  (From  letter  signed 
Commissioner  W.  H.  Osborn,  and  dated  May  18,  1916.) 

Depreciation  Allowance  and  Treatment  of  Expense  for  Repairs,  Im- 
provements on  Buildings  Built  on  Leaseholds  by  Lessee  or  Acquired  as 
Part  of  Purchased  Leasehold:  The  capital  of  a  corporation  invested 
in  buildings  erected  upon  a  plot  of  ground  which  it  holds  under  lease 
may  be  returned  to  the  corporation  through  annual  deductions  based 
upon  the  cost  of  such  building  and  its  estimated  life  or  the  life  of  the 
lease,  whichever  the  case  may  be;  that  is,  if  the  life  of  the  lease  is  less 
than  the  life  of  the  building,  and  such  building,  with  improvements, 
will  automatically  be  taken  up  by  the  owner  of  the  land  in  fee  sim- 
ple at  the  expiration  of  the  lease,  then  this  office  is  of  the  opinion  that 
the  cost  of  the  building  should  be  divided  by  the  number  of  years 
represented  in  the  life  of  the  lease  and  that  equal  deduction  made  from 
gross  income  in  each  year  for  the  purpose  of  returning  to  the  corpora- 
tion the  original  cost  of  the  building.  On  the  other  hand,  if  the  life 
of  the  lease  is  longer  than  the  estimated  life  of  the  building,  then  the 
annual  deduction  made  by  the  corporation  should  be  based  on  the  cost 
of  the  building  and  its  estimated  life  in  years,  and  the  number  of  years 
constituting  the  life  of  the  lease  need  not  enter  into  such  calculations. 
In  any  event,  the  corporation  is  not  entitled  to  two  deductions  for  the 


TREASURY  DECISIONS  137 

same  purpose,  and  therefore,  setting  up  of  a  fund  to  make  good  the 
capital  invested  is  not  allowed. 

The  cost  of  incidental  repairs,  etc.,  which  do  not  add  to  the  life 
of  the  buildings  by  improvements,  etc.;  may  be  charged  against  the  an- 
nual income  of  each  year,  but  in  the  event  that  improvements  are  made 
in  the  property  then  the  cost  of  such  improvements  should  be  divided 
by  the  remaining  life  of  the  lease  after  the  improvement  has  been 
made  and  an  annual  deduction  made  from  the  gross  income  on  this 
basis. 

In  no  event  can  the  corporation  be  allowed  to  deduct  the  de- 
preciation, as  such,  upon  physical  property  in  which  it  has  no  title. 
(Deputy  Commissioner  L.  F.  Speer,  February  27th,  1917.) 

Dividends,  Life  Insurance  Policies:  Dividends  paid  on  life 
insurance  policies  that  have  not  matured,  whether  drawn  in  cash  or 
applied  to  the  reduction  of  annual  premiums  due,  are  not  considered 
items  of  taxable  income,  and  should  be  excluded  from  returns. 

Dividends  from  Paid-Up  Policies  are  considered  income  and  must 
be  included  in  the  annual  return.  They  are  considered  same  as  divi- 
dends from  corporations  subject  to  a  like  tax.  (T.  D.  2137.) 

Dividends,  when  record  owner  is  not  actual  owner,  and  actual 
owner  is  a  resident  of  the  United  States:  A  certificate  need  not  be 
filed  by  the  record  owner  of  stock  when  the  actual  owner  is  a  citizen 
or  resident  of  the  United  States.  Record  owner  of  stock  is  not  required 
to  include  in  his  personal  return  of  such  stock. 

Salaries  and  Professional  Fees:  An  amount  of  salary  which  was 
earned  during  a  month  prior  to  December  31st,  1915,  and  was  not  re- 
ceived until  some  date  subsequent  to  December  31st,  need  not  be 
returned  as  income  for  that  year.  It  should  be  returned  for  the  year 
in  which  it  is  received. 

Dividends  in  the  Hands  of  Fiduciary,  and  belonging  to  beneficiary, 
are  not  subject  to  normal  tax,  but  are  subject  to  the  additional  tax, 
whenever  the  beneficiary's  income  from  all  taxable  sources  is  in  excess 
of  twenty  thousand  ($20,000.00)  dollars.  (T.  D.  2090.)  Under  act  of 
1916.) 

Dividends  on  Corporate  Stock,  Etc.:  Form  1041  prior  to  the  passage 
of  the  Act  of  September  8th,  1916,  on  such  form  entries  on  first  page, 
in  column  O,  headed  "BENEFICIARIES,"  should  not  include  their 
respective  shares  of  income  derived  from  stocks  or  earnings  of  corpora- 
tions, stock  companies,  etc.,  subject  to  like  tax  where  the  income  has 
been  deducted  and  withheld  at  source.  (T.  D.  2231.) 

Dividends  in  hands  of  fiduciary  belong  to  beneficiary,  subject  to 
additional  tax,  when  such  income  is  in  excess  of  $20,000.  (T.  D.  2090.) 

Dividends  Declared  From  Accumulated  Profits  During  Life  of  Dece- 
dent and  Subsequent  to  March  1st,  1913,  Are  Taxable  in  Year  Received: 
Trustees  are  required  to  make  returns  and  pay  taxes  for  persons  for 
whom  they  act.  Where  they  act  for  and  make  distribution  within  taxa- 
ble period  they  are  required  to  make  return  and  withhold  normal  tax. 
Where  they  act  for  undetermined  individuals  or  for  an  individual  not 
entitled  to  receive  income  within  taxable  period,  they  are  held  to  be  the 
agents  of  such  beneficiaries,  and  as  such  fiduciary  and  agent  required  to 
make  return  and  pay  tax  upon  the  amount  received.  Accumulation  in  the 
hands  of  a  trustee  equivalent  to  distribution  in  sum  of  accumulation. 

Dividends  Paid  by  Foreign  Corporations  deriving  their  entire  in- 
come from  business  within  the  United  States,  and  subject  to  tax  under 
income  tax  law,  shall  be  treated  in  the  same  manner  as  dividends  from 
domestic  corporations.  (T.  D.  2090.) 

Dividends  of  Other  Corporations:  The  income  received  by  corpo- 
rations on  account  of  dividends  will  be  subject  to  tax  in  hands  of  com- 
pany paying  the  same,  being  a  part  of  its  earnings  and  also  in  hands 


138  TREASURY  DECISIONS 

of  company  receiving  same.  The  Income  Tax  Law  specifically  sets  out 
there  shall  be  returned  as  gross  income  all  income  received  from  all 
sources  during  the  year  for  which  return  is  made,  and  specifically 
enumerates  items  which  may  be  deducted  from  such  gross  income. 
There  is  no  provision  whereby  dividends  received  from  other  corpora- 
tions may  be  deducted.  (T.  D.  2137.) 

Dividends  Received  From  Subsidiaries:  Every  corporation  no  mat- 
ter how  closely  related  to  dny  other  corporation,  is  required  to  make 
return  of  annual  net  income,  and  to  pay  income  tax  upon  same. 

Parent,  holding,  or  other  corporations  must  include  in  their  gross 
income,  and  cannot  deduct  therefrom  any  dividends  or  share  of  earn- 
ings which  they  may  receive  from  a  subsidiary  corporation.  The  fact 
that  parent  company  owns  all  stock  of  subsidiary  company  is  imma- 
terial, and  will  not  warrant  such  company  in  omitting  said  divdends 
from  gross  income.  (T.  D.  2090.) 

In  case  wherein  a  holding  company  takes  up  each  month  on  its 
books  proportionate  share  of  earnings  of  underlying  companies  such 
holding  company  will  be  required  to  include  in  its  gross  income  the 
amounts  taken  up  regardless  of  the  fact  that  the  same  may  not  have 
been  paid  to  it  in  cash.  The  fact  the  underlying  companies  credit  to 
holding  company  amount  of  earnings  to  which  it  is  entitled  on  basis 
of  the  stock  it  holds,  together  with  facts  that  holding  company  takes 
upon  its  books  the  amount  thus  credited  renders  it  incumbent  upon 
holding  company  to  return  these  amounts  as  income,  regardless  of  the 
fact  that  underlying  companies  needed  these  earnings  and  used  them 
in  furtherance  of  their  business. 

Expenditures  for  extensions  and  improvements  being  chargeable  to 
account  of  subsidiary  companies  are  not  deductible  from  gross  income 
and  therefore  will  not  have  the  effect  to  reduce  the  earning  to  their 
respective  shares  to  which  the  stock  holders  are  entitled.  (T.  D.  2137.) 

Stock  Dividends:  Stock  dividends  paid  from  earnings  or  undivided 
profit  of  corporation,  etc.,  held  to  be  equivalent  of  cash,  and  to  con- 
stitute taxable  income  under  same  conditions  as  cash  dividends.  (T.  D. 


Cash  Value  of  Stock  Dividends.  Calculation  of:  Stock  dividends 
should  be  accounted  for  at  valuation  placed  upon  stock  by  the  corpo- 
ration when  said  stock  dividends  were  issued.  (T.  D.  2090.) 

Stockholdings,  Compensation  Based  on:  Amounts  paid  as  com- 
pensation to  officers  or  employees,  based  upon  stockholdings  of  such 
officers  or  employees,  held  to  be  dividends,  although  paid  in  lieu  of 
salaries  or  wages,  and  are  not  allowable  deductions  from  gross  income 
for  reason  that  dividends  are  not  deductible.  (Art.  119,  Reg.  33.) 

Certificate  Form  1087  to  Disclose  Actual  Ownership  and  Claim  Ex- 
emption From  Withholding  at  Source  of  Domestic  Dividend  Payments: 
When  a  non-resident  alien  or  record  owner  of  stock  of  domestic  or 
resident  corporation  is  an  organization  subject  to  withholding  at  source 
of  dividend  payment,  as  provided  by  Section  13(F)  by  Act  of  Sep- 
tember 8th,  1913,  but  is  not  actual  owner  of  the  stock,  such  record  own- 
er may  adapt  income  tax  certificate  Form  1087  to  disclose  actual  own- 
ership and  to  claim  exemption  from  withholding  by  striking  out  the 
words,  "to  be  filed  with  representative  in  the  United  States  of  such 
foreign  principal,"  in  the  caption  and  the  words,  "in  the  United  States," 
in  the  body  of  the  form,  and  executing  the  certificate  as  the  representa- 
tive of  the  actual  owner  as  provided  in  the  space  for  the  signature. 

Dividends  Paid  in  Liberty  Loan  Bonds  Are  Taxable  Income  to  Stock- 
holders Receiving  Them  to  the  Same  Extent  That  Other  Dividends  Are 
Taxable:  Under  the  Income  Tax  Act  of  September  8th,  1915,  Liberty 
Loan  Bonds  purchased  from  the  earnings  or  profits  of  a  corporation  that 
have  accrued  since  March  1st,  1913,  will  constitute  income  to  the  stock- 
holders to  the  amount  of  the  earnings  or  profits  invested  by  the  corpora- 


TREASURY  DECISIONS  139 

tion  in  the  bonds.  If  the  bonds  were  purchased  from  earnings  or  profits 
accrued  prior  to  March  1,  1913,  they  would  not  represent  taxable  income; 
and  if  surplus  from  which  they  were  purchased  accrued  in  part  before  and 
in  part  after  March  1st,  1913,  they  would  represent  taxable  income,  under 
the  provision  of  law  applicable  to  dividends,  to  the  amount  of  surplus 
accrued  since  that  date. 

The  income  derived  by  an  individual  from  the  interest  paid  on  Liberty 
Loan  Bonds  does  not  constitute  taxable  income,  whether  the  bonds  have 
been  received  as  a  dividend,  or  otherwise, 

Dividends  Declared  From  Depreciation  and  Depletion  Reserves:    The 

Federal  Income  Tax  Law  of  September  8th,  1916,  authorizes  corporations, 
joint-stock  companies,  etc.,  when  making  annual  income  tax  returns  to 
deduct  from  gross  income  a  reasonable  allowance  for  the  exhaustion, 
wear  and  tear  of  the  property,  arising  out  of  the  future  employment  in 
the  business  or  trade,  and  in  the  case  of  oil  and  gas  wells  and  mines,  a 
reasonable  allowance  for  depletion  of  natural  products. 

When  such  deductions  are  made  and  their  amounts  are  carried  to  a 
reserve  account  and  later  a  dividend  declared  and  paid  to  that  account, 
the  amount  of  the  dividend  is  held  to  represent  a  return  of  capital 
invested,  and  is  not  subject  to  income  tax  in  the  hands  of  the  share- 
holders. (Deputy  Commissioner  L.  F.  Speer,  July  14th,  1917.) 

Exemptions  in  Case  of  Corporations,  Exempt  Organizations,  Part- 
nerships and  Fiduciaries:  Certificate  No.  1065  is  provided  for  such 
fiduciaries  for  the  purpose  of  establishing  their  identity  of  non-liability 
to  withholding  at  source.  (T.  D.  1998.) 

Certificate  Form  1063  Not  Required  on  Payment  to  Non-Fiduciary: 

When  payment  other  than  interest  on  corporate  bonds  is  made  and 
payor  has  knowledge  that  payee  is  a  firm  corporation  or  fiduciary,  he 
need  not  require  an  exemption  certificate. 

United  States,  State   or  Political   Subdivision   Obligations  Exempt: 

Income  derived  from  interest  upon  obligation  of  a  State,  County,  or  any 
Political  Subdivision  thereof  and  upon  obligations  of  the  United  States 
or  its  possessions  not  subject  to  income  tax,  and  ownership  certificates  in 
connection  with  coupons.  (Art.  37,  Reg.  33.) 

Exemption  May  Be  Pro-rated  Between  Husband  and  Wife:  Specific 
exemptions  from  aggregate  income  of  husband  and  wife  may  be  claimed 
by  either,  or  may  be  pro-rated  between  them  in  any  proportion  which 
may  be  agreed  upon.  In  such  case  certificate  Form  1000-B,  showing 
exemption  claims,  and  pro-rated  agreement  should  be  accepted  by  debtor 
corporation. 

Exemption,   Method  of   Claiming   by  Joint   Owners   of  Bonds:     If 

securities  are  owned  jointly  by  several  persons,  certificates  of  ownership 
covering  income  derived  therefrom,  Form  1000  and  1000-B  may  be 
signed  by  joint  owners,  with  names,  addresses,  and  proportion  of  owner- 
ship of  each  on  back  thereof. 

When  certificate  of  ownership  claiming  exemption  is  filed,  persons 
signing  same  may  claim  exemption  thereon  only  in  his  own  right;  such 
other  joint  owners  as  desire  to  claim  exemption  against  their  share  of 
income  should  file  with  signer  thereof  certificates  on  Form  1007,  and 
should  be  attached  to  joint  certificates  when  presented  with  coupons. 
(Deputy  Commissioner  J.  E.  Fletcher.) 

Resident  Foreign  Corporations,  Exempt  Associations,  Non-Resident 
Foreign  Exempt  Associations:  Foreign  organizations  engaged  in  busi- 
ness within  the  United  States  are  subject  to  the  normal  tax  upon  amount 
of  net  income  accruing  from  business  transacted  and  capital  invested 
within  the  United  States;  but  said  organizations  are  exempt  from  any 
part  of  income  withheld  by  a  debtor  or  withholding  agent,  and  such 
claim  should  be  made  on  Form  1001,  for  interest  and  corporate  securities, 
and  on  Form  1063  for  miscellaneous  income.  (Art.  46,  Reg.  33.) 


140  TREASURY  DECISIONS 

Exemption,  Method  of  Claiming  by  Citizen  or  Resident  on  Interest: 
In  event  such  coupon,  checks,  or  bills  of  exchange  above  mentioned  are 
presented  for  collection  by  individual  claiming  benefit  of  exemption, 
such  individual  shall  be  permitted  to  avail  himself  of  exemption  claimed, 
upon  signing  Form  1000*B,  and  no  tax  shall  be  deducted  for  amount  of 
exemption  so  claimed.  (Art  60  Reg.  33.) 

Corporations;  Donations  to  Fairs:  A  corporation  engaged  in  agri- 
cultural business  cannot  be  allowed  to  make  deduction  from  gross  income 
on  account  of  donations  to  Fairs,  Churches,  and  associations,  such  dona- 
tions being  made  for  obtaining  and  preserving  good  will  of  Farmers 
who  raise  crops  for  it,  since  amounts  so  expended  are  clearly  in  the 
nature  of  gratuities  and  are  not  necessary  expense  of  operation  and 
maintenance,  there  is  no  such  consideration  in  this  case  as  is  contem- 
plated in  T.  D.  2090.  (Acting  Commissioner  D.  E.  Fletcher,  May  25th, 
1915.) 

License  not  Required  of  Collecting  Agents  for  Substitution  of  Cer- 
tificates: Until  further  ruling  by  this  department,  collecting  agents  may 
substitute  their  certificates  of  ownership  under  foregoing  plan,  and  will 
not  be  required  to  secure  license  from  Treasury  Department,  provided 
regulations  are  strictly  complied  with.  (T.  D.  1903.) 

Said  provision  extended  to  responsible  banks  and  bankers  and  col- 
lection agents  in  foreign  countries  through  whom  collection  of  such 
interest  coupons  is  made.  (Art.  40,  Reg.  33.) 

Endorsement  Required  on  Substituted  Certificates:     The  certificate 
of  the   owner   for  which   certificate   of   collecting   agent   is   substituted, 
must  be  given  following  endorsements  by  collecting  agents: 
Owner's  certificate  No 


(Name  of  collecting   agency) 

191.. 

(Give  date  of  certificate) 

The  counterpart  of  the  within  certificate  bearing  like  number  is 
attached  to  the  coupons  within  mentioned  for  the  delivery  to  the  debtor 
or  withholding  agent,  by  whom  coupons  are  payable.  (T.  D.  1903.) 

Endorsement  on  Check  When  Certificates  of  Exemption  are  Filed 
with  Debtor  in  Case  of  Registered  Interest:  Where  such  certificates 
are  so  filed,  debtor  shall  stamp  or  write  on  interest  order  or  check, 
"Exemption  claimed  by  certificate  filed  with  debtor."  (T.  D.  1974.) 

Life  Insurance:  The  amount  paid  under  life  insurance,  endowment, 
or  annuity  contract  is  not  income  when  returned  to  person  making  the 
contract,  either  upon  maturity  or  surrender  of  contracts;  but  the  amount 
by  which  such  sum  exceeds  the  amount  paid  is  considered  income. 
(T.  D.  2090,  as  amended  by  T.  D.  2152,)  (Art.  5,  Reg.  33.) 

Dividends  from  Paid-Up  Life  Insurance  policies  must  be  included 
in  the  annual  return  of  income.  Considered  the  same  as  dividends  from 
corporations  subject  to  a  like  tax.  (T.  D.  2137.) 

Insurance  Policies  Paid  pursuent  to  contract  are  held  not  to  be 
taxable  in  the  hands  of  the  beneficiaries,  hence,  in  the  payment  of  such 
proceeds,  whether  the  same  be  in  lump  sum  or  installments,  at  the 
death  of  the  insured  on  a  matured  policy,  or  as  annuities,  no  withholding 
of  the  tax  is  required. 

Payment  of  deferred  dividends  in  so  far  as  they  represent  portions 
of  actual  premiums  received,  are  proceeds  of  insurance  policy  within 
the  meaning  of  the  law. 

So  much  of  annuities  paid  to  annuitant  as  represents  payment  made 
by  him  upon  such  contract,  need  not  be  included  in  the  income  of  an- 
nuitant. An  increment  on  price  of  annuity  is  taxable  income,  and  if  in 
excess  of  three  thousand  ($3,000.00)  dollars,  and  no  exemptions  claimed, 
tax  must  be  withheld. 


TREASURY  DECISIONS  141 

Coupons  of  the  Gold  Policy  Bond  come  under  the  class  of  obliga- 
tions of  an  insurance  company  defined  in  the  law  as  not  subject  to  the 
tax,  and,  as  such,  certificates  of  ownership  will  not  be  required  when 
payments  of  the  coupons  of  these  policies  are  made. 

Fiduciaries,  Returns  Prior  to  Settlements  of  Estates:  Under  T.  D. 
2231,  an  estate  cannot  be  without  a  beneficiary  for  income  tax  purposes. 

Income  Undistributed  From  Trust  Estates:  The  income  of  trust 
estates  is  subject  to  income  tax,  as  any  other  income.  When  such 
income  received  annually  by  beneficiary  of  an  estate,  the  fiduciary  will 
withhold  normal  tax  due.  Any  part  of  annual  income  of  such  estate 
not  distributed  becomes  an  entity,  and  such  is  liable  to  both  normal 
and  additional  tax.  When  beneficiary  is  incapacitated,  and  income  is 
retained  by  fiduciary,  income  will  be  taxable  as  for  an  individual,  and 
fiduciary  will  pay  both  normal  and  additional  tax.  When  gross  net 
income  undistributed  in  hands  of  fiduciary  is  less  than  twenty  thousand 
($20,000.00)  dollars,  estate  will  be  listed  as  a  beneficiary  and  only  the 
normal  tax  will  be  assessable  and  paid  by  the  fiduciary.  When  gross 
net  income  not  distributed  exceed  twenty  thousand  dollars  ($20,000.00), 
it  is  subject  both  to  normal  and  additional  tax,  and  should  be  paid  by 
fiduciary.  (T.  D.  2231.) 

Return  of  Income  Accruing  to  Trust  Estates:  Fiduciaries  shall  on 
or  before  March  1st,  of  each  year  render  return  on  Form  1041  of  income 
in  their  custody  or  control,  when  annual  income  is  in  excess  of  three 
thousand  ($3,000.00)  dollars,  and  also  when  undistributed  income  of 
estate  shall  exceed  twenty  thousand  ($20,000.00)  dollars.  In  such  case 
estate  shall  be  reported  beneficiary  for  undistributed  income.  (T.  D. 
2231.) 

Exchange  of  Coupon  Interest  for  Funding  Bonds:  Exchange  of  in- 
terest for  funding  bonds  is  payment  of  interest  on  bonds  and  tax  should 
be  imposed  and  paid  upon  such  interest  for  year  in  which  it  matures 
and  payment  is  made,  in  the  absence  of  claim  for  exemption  the  tax 
should  be  deducted  and  withheld  on  amount  represented  by  coupons. 
(T.  D.  2090.) 

Quarters,  Expenses  of  Government  Officers  and  Employees:  Com- 
mutation of  quarters  and  the  money  equivalent  of  quarters  furnished 
in  kind  shall  be  returned  as  income.  When  quarters  are  furnished 
in  a  less  number  of  rooms  than  allowed  by  law,  only  the  money 
equivalent  to  the  number  of  rooms  assigned  shall  be  returned  as 
income.  When  quarters  are  furnished  in  a  greater ,  number  of  rooms 
than  allowed  by  law,  it  is  to  be  assumed  that  the  excess  rooms  are 
assigned  for  the  convenience  of  the  Government,  and  the  money  equiva- 
lent only  to  the  number  of  rooms  allowed  by  law  shall  be  returned  as 
income.  Amounts  received  by,  or  paid  for,  an  officer  for  heat  and 
light  shall  be  returned  as  income. 

Mileage:  The  difference  between  the  amount  received  and  the 
amount  of  actual  necessary  expenses  incurred  on  a  journey  shall  be  re- 
turned as  income.  Mileage  is  not  gain  or  profit  or  income  to  the  officer 
as  he  is  required  to  pay  his  actual  expenses  while  traveling  under 
mileage  orders.  (T.  D.  2079.) 

The  actual  expenses  to  be  deducted  by  the  individual  before 
ascertaining  his  profit  on  account  of  mileage  are  the  expenses  for  which 
reimbursement  would  have  been  made  by  the  Government  if  he  traveled 
on  an  actual  expense  basis. 

Amounts  paid  by  the  Government  in  the  nature  of  reimbursement 
for  subsistence  and  other  items  of  actual  expenses  incurred  while  on 
business  for  the  Government  need  not  be  returned  as  income. 

The  difference  between  amount  received  as  per  day  allowance  and 
amount  of  actual  necessary  expenses  incurred  shall  be  returned  as  in- 
come. (T.  D.  2079.) 


142  TREASURY  DECISIONS 


Farm  Machinery  is  not  an  allowable  reduction,  as  an  item  of  ex- 
pense, the  cost  of  ordinary  tools  may  be  included  under  such  item. 

Under  the  sixth  deduction  enumerated  in  paragraph  (b),  providing 
a  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  property 
arising  from  its  use  or  employment,  there  may  be  claimed  a  reasonable 
allowance  for  depreciation  on  farm  buildings,  other  than  dwellings 
occupied  by  owner,  farm  machinery,  and  other  physical  property,  in- 
cluding stock  purchased  for  breeding  purposes;  but  no  claim  for  depre- 
ciation on  stock  raised  for  resale  will  be  allowed. 

Expenses:  Of  operation  and  maintenance  shall  include  all  expendi- 
tures for  material,  labor,  fuel,  and  other  items  entering  into  the  cost  of 
goods  sold  or  inventoried  at  end  of  year,  and  all  other  expenses  incurred 
in  operation  of  business  except  such  as  are  required  by  act  to  be  segre- 
gated in  return.  (Art.  114,  Reg.  33.) 

Extension  Because  of  Absence  in  Foreign  Country:  By  reason  of 
absence  in  foreign  countries  it  is  impossible  for  many  individuals  to 
receive  notice  and  demand  on  Form  17  and  make  payment  of  taxes 
assessed  so  same  can  be  received  by  collector  within  ten  day  period 
following  June  15th,  or  within  the  ten-day  period  following  the  service 
of  notice.  Collectors  are  requested  therefore  to  enter  on  Form  17,  as 
the  date  on  which  such  tax  becomes  due  and  payable,  as  near  as  a 
date  ten  days  subsequent  to  the  time  that  said  notice  should  be  received 
in  ordinary  course  of  mails  by  the  taxpayer,  and  where  it  appears  the 
full  amount  of  tax  assessed  is  placed  in  the  mails  within  the  ten-day 
period  upon  receipt  of  such  notice,  or  in  case  notice  is  not  delivered 
in  due  time  by  reason  of  the  delay  in  mail  and  satisfactory  evidence 
of  this  fact  furnished,  penalty  and  interest  will  not  be  collected.  In 
latter  case  envelope  enclosing  notice  should  be  forwarded  to  the  collector 
and  by  him  transmitted  to  Treasury  Department  with  Form  325  as 
evidence  of  delay  in  delivery  of  notice. 

This  ruling  applies  solely  to  the  collection  of  income  tax  from 
individuals  and  includes  Government  officers.  (T.  D.  2028.) 

Fiduciaries,  Are  Subject  to  the  Payment  of  Additional  Tax  Upon 
Incomes  Received  for  the  Benefit  of  Their  Principals:  A  beneficiary 
is  liable  for  the  amount  of  normal  tax  derived  by  him  through  a  fiduciary 
less  the  amount  of  exemptions  claimed,  and  the  amount  of  income  on 
which  normal  tax  has  been  withheld  at  source,  is  also  liable  for  the  ad- 
ditional tax  upon  the  net  income  received  by  him  in  excess  of  the  normal 
tax,  the  amount  derived  by  him  from  an  estate  and  all  other  taxable 
sources  is  required  to  be  shown  on  his  personal  annual  return.  (T. 
D.  2090.) 

Committee  for  Incompetent  Considered  Fiduciary:  Under  the  In- 
come Tax  Law,  such  persons  regarded  as  a  fiduciary,  and  may  use  Form 
No.  1015,  revised,  when  claiming  exemption  from  withholding  at  source; 
No.  1019,  revised,  when  not  claiming  exemption  from  withholding 
at  source. 

When  income  from  other  sources  than  interest  on  bonds  of  do- 
mestic corporations  is  to  be  collected  in  excess  of  three  thousand  dol- 
lars, such  a  fiduciary  may  secure  withholding  exemption  at  source 
by  filing  Form  1063. 

Fiduciaries,  No  Withholding  Against  Upon  Notice:  By  filing 
notice  with  withholding  agents,  said  fiduciary  shall  be  exempt  from 
having  any  income  withheld  by  any  withholding  agent,  and  such  with- 
holding agents  will  in  such  case  not  be  held  liable  for  normal  tax,  upon 
such  incomes.  (T.  D.  2231.) 

Exemption  Claim  on  Interest  on  Corporate  Securities:  Form  1015 
should  be  filed  with  debtor  or  withholding  agent  by  fiduciary.  (T.  D. 
2231.) 

Fiduciaries,  Procedure  When  Waive  Exemption  Claim  on  Interest 
on  Corporate  Securities:  In  such  case  notices  should  be  made  thereof 


TREASURY  DECISIONS  143 

on  Form  1019,  but  Form  1019  cannot  be  used  when  income  affected 
is  payable  by  fiduciary  to  beneficiary  who  would  be  exempt  from 
income  tax  if  such  were  payable  to  him  directly.  (T.  D.  2231.) 

When  fiduciary  uses  above  form,  debtor  organization  should  with- 
hold normal  tax,  and  fiduciaries  receiving  the  same  should  not  be  re- 
quired again  to  deduct  tax  on  such  income.  (T.  D.  1911.) 

Fiduciary  May  Make  Return  for  Beneficiary:  As  each  fiduciary 
acts  in  behalf  of  the  beneficiary  of  trust,  return  is  required  in  such  cases 
only  on  income  accruing  and  payable  to  such  beneficiary,  and  not  the 
income  of  beneficiary  derived  from  other  sources.  If,  however,  fidu- 
ciary is  legally  authorized  to  act  for  such  beneficiary  as  agent  or 
attorney  in  fact,  he  may  in  such  case  also  make  personal  return  for  said 
beneficiary. 

Tax  Liability  of  Income  Received  from  Sources  Within  the  United 
States  by  Foreign  Governments  or  Their  Resident  Agent:  Under  pro- 
vision Section  9-g  of  the  act  of  September  8th,  1916,  which  declares 
the  intents  and  purpose  of  the  Federal  Income  Tax  Law,  it  was  held 
that  total  net  income  received  during  each  calendar  year  by  foreign 
governments  from  sources  within  the  United  States  arising  from  in- 
terest on  bonds,  notes,  or  other  interest-bearing  obligations  of  resi- 
dents, corporate  or  otherwise,  and  including  the  income  derived  from 
dividends  on  the  capital  stock,  or  from  net  earnings  of  resident  cor- 
porations, etc.,  whose  net  income  is  subject  to  a  like  tax,  is  subject  to  a 
tax  of  2  per  centum  (Section  10),  effective  as  of  January  1st,  1916. 

Returns  shall  be  made  and  the  tax  shall  be  paid  under  liabilities 
named  in  the  law  by  actual  owners  of  the  income  or  the  proper  repre- 
sentatives in  the  United  States  having  its  receipt,  custody,  control  or 
disposal. 

Treasury  Regulations  based  on  withholding  provisions  of  Act  of 
September  8th,  1916  (Section  13  e  and  f)  will  be  held  effective  in  case 
of  foreign  governments  or  their  representatives  as  of  January  1st,  1917. 

Income  Tax  Form  1012  Adapted  for  Use  by  Debtor  Corporation 
When  Reporting  Income  Taxes  Held  from  Payments  to  Non-Resident 
Alien  Corporations:  Duty  of  withholding  income  tax  from  dividends 
under  Section  13  of  act  of  September  8th,  1916,  rests  upon  domestic  or 
other  resident  corporation  paying  the  dividends.  When  it  shall  appear 
that  actual  owner  of  stock  is  non-resident  alien  corporation,  etc.,  debtor 
or  issuing  corporation  in  United  States  shall  withhold  one  per  cent 
(1%)  from  September  9th  to  December  31st,  1916,  inclusive,  and  two 
per  cent  (2%)  thereafter,  as  income  tax  from  amount  of  dividend  it 
pays  to  non-resident  alien  corporation,  etc.,  and  shall  make  return  of 
such  withholding. 

Until  such  returns  are  printed  and  distributed,  debtor  will  use  Form 
1012,  and  stamp  across  printed  declaration  at  top,  "Monthly  return  of 
income  tax  withheld  from  dividends  paid  to  non-resident  alien  cor- 
porations, etc." 

Name  and  address  of  withholding  agent  of  debtor  corporation  will 
be  inserted  in  blanks  provided  for  that  purpose,  and  there  is  no  exemp- 
tion which  may  be  claimed  by  a  non-resident  alien  corporation  in  receipt 
of  income  from  domestic  corporate  obligations,  the  column  "amount 
of  exemption  claimed"  and  column  "amount  of  income  on  which  with- 
holding agent  is  liable  for  tax"  will  be  disregarded.  The  amount  ^of 
dividends  in  each  case  will  be  entered  in  the  column  "amount  of  in- 
come," and  the  amount  withheld  will  be  entered  in  the  last  column. 

Such  return  will  be  accepted  by  this  office  as  compliance  with  the 
requirement  for  monthly  return,  pending  printing  and  distribution  of 
forms  specially  provided  for  that  purpose.  (T.  D.  2388.) 

Form  1044,  Revision  of,  for  Monthly  List  Return:  Collectors  are 
advised  that  original  Form  1044  for  monthly  return  of  amount  of  nor- 


144  TREASURY  DECISIONS 

mal  tax  withheld  by  collecting  agency  has  been  revised  in  the  follow- 
ing particulars,  so  that  tax  withheld  from  interest  on  bonds  of  different 
classes  can  be  reported  thereon. 

In  section  of  reading  matter  beginning  "To  be  made  in  duplicate," 
in  fourth  line  thereof,  change  "coupon"  to  "coupons"  and  strike  out 
"and  interest  orders." 

In  last  line  next  above  tabular  list,  strike  out  blank  lines  and 
words  thereunder,  "describe  the  particular  issue  of  bonds,"  and  "state 
"name"  and  "address";  "name  of  debtor  corporation";  "name  of  par- 
tabular  list  and  substitute  therefor  in  separate  columns,  "Party  pre- 
senting coupons,"  and  immediately  thereunder,  in  separate  columns, 
"name"  and  "address";  "name  of  debtor  corporation";  name  of  par- 
ticular issue  of  bonds";  "amount  of  income  subject  to  tax,"  and  "amount 
of  tax  withheld." 

Immediately  after  and  underline  of  totals  of  tabular  list  there  shall 
be  a  doubled  rule  line.  Strike  out  words  now  appearing  below  total 
line  of  tabular  list  on  Form  1044,  viz.,  "amount  of  tax  remitted  here- 
with (if  any)  to  collector,"  and  strike  out  dotted  line  following  these 
words,  and  also  "$"  mark  on  same  line;  and  strike  out  the  double  ruled 
line  appearing  immediately  thereunder.  (T.  D.  1973.) 

Property  Acquired  by  Gift:  The  value  of  property  acquired  by 
gift  is  not  subject  to  income  tax,  but  all  gains  or  profits  derived  there- 
from are  subject  to  tax,  and  if  property  so  acquired  is  subsequently 
sold  at  a  greater  price  than  the  value  at  the  time  property  was  acquired, 
the  gain  in  value  is  held  to  be  income,  and  subject  to  tax,  under  Federal 
Income  Tax  Law.  (T.  D.  2090.) 

Good  Will:  No  depreciation  can  be  claimed  as  an  allowable  de- 
duction in  a  return/  incident  to  the  money  value  of  the  good  will  of  a 
business. 

Holding  Companies  Doing  Business  Under  the  Old  Excise  Tax  Law: 
In  Butterick  Company  vs.  United  States,  March  5,  1917;  in  action  to 
recover  excise  taxes  paid  under  protest  it  was  held  that  a  holding  com- 
pany which  did  nothing  more  than  to  receive  and  distribute  income 
derived  from  dividends  paid  by  subsidiary  operating  companies  cannot  be 
regarded  as  engaged  in  business  in  a  way  which  would  subject  either  of 
them  to  an  excise  tax. 

Husband  and  Wife,  Tax  Computed  on  Separate  Incomes:  The 
regulations  of  the  department  require  the  incomes  of  husband  and 
wife  to  be  combined  and  authorizing  the  aggregate  exemption  of  two 
thousand  dollars  ($2,000.00)  are  applicable  for  normal  tax  only.  The 
additional  tax  will  be  computed  on  the  amount  of  each  individual's 
income  in  excess  of  the  minimum  amounts  upon  which  the  additional 
tax  at  the  graduated  rate  is  to  be  calculated. 

Separate  incomes  of  husband  and  wife  should  not  be  combined  for 
the  purpose  of  additional  tax.  (T.  D.  2137.) 

Husband  and  Wife:  Constitutionality  of  the  act  of  October  3, 
1913,  was  attacked  because  of  discriminating  features  of  the  specific 
exemption  provision.  The  United  States  Supreme  Court  upheld  the 
constitutionality  of  the  act. 

Husband  and  wife  living  together  entitled  to  an  exemption  of 
$4,000  from  the  aggregate  net  income  of  both  which  may  be  deducted 
in  making  return  of  such  income  for  taxation.  (Art.  10,  Reg.  33.) 

If  husband  and  wife  are  living  together,  having  separate  estates,  the 
income  from  both  may  be  made  on  one  return,  but  income  of  each  and 
full  name  and  address  of  both  must  be  shown  in  such  return. 

The  husband  as  head  of  and  legal  representative  of  the  household 
should  render  a  return  of  actual  income  of  himself  and  wife  and  it  is 
assumed  he  can  ascertain  said  income. 

If  wife  has  separate  estate  managed  by  herself  having  an  income  of 
three  thousand  dollars  or  over,  she  may  make  her  own  return,  and  if 
husband  has  other  net  income  making  the  aggregate  of  both  incomes 


TREASURY  DECISIONS  145 

more  than  $4,000,  wife's  return  should  be  attached  to  return  of  husband 
or  his  income  should  be  included  in  her  return  in  order  that  a  deduction 
of  $4,000  may  be  made  from  the  aggregate  income  of  both.  Tax  in 
such  case  being  imposed  only  on  so  much  of  the  aggregate  incomes  of 
both  as  shall  exceed  $4,000. 

If  either  husband  or  wife  has  separately  an  income  equal  to  or  in 
excess  of  $3,000,  a  return  is  required  under  the  law,  and  such  return 
must  include  the  income  of  both,  and  return  must  be  made  even  though 
combined  income  be  less  than  $4,000. 

If  aggregate  net  income  of  both  exceeds  $4,000,  return  must  be 
made  in  the  manner  stated,  although  neither  one  have  income  of  $3,000 
per  annum.  They  are  jointly  and  separately  liable  for  such  return  and 
payment  of  the  taxes. 

Single  or  married  status  of  the  person  claiming  the  specific  exemp- 
tion shall  be  determined  as  of  the  time  of  such  claim,  if  claim  be  made 
within  the  year  for  which  return  is  made,  otherwise  the  status  at  the 
close  of  year.  (Art.  10,  Reg.  33.) 

Unless  wife  has  separate  estate  which  requires  her  to  file  a  separate 
return  of  income  or  to  join  with  her  husband,  a  husband  haying  a 
taxable  income  of  his  own  should  include  in  his  return  the  income 
accruing  to  the  wife  from  special  magazine  articles.  If  neither  has 
income  of  $3,000  or  more,  but  together  have  an  aggregate  income 
exceeding  $4,000,  a  return  of  joint  income  is  required  to  be  filed  by 
either  the  husand  or  wife,  and  income  above  mentioned  should  be  in- 
cluded in  such  return.  The  actual  proceeds  coming  into  wife's  posses- 
sion during  the  tax  year  and  not  the  amounts  estimated  upon  the 
acceptance  of  publication  prior  to  payment  should  be  included  in  return 
for  such  taxable  year.  (T.  D.  2135.) 

Husband  and  Wife,  Death  Of:  Where  either  dies  during  the  year 
having  income  of  $3,000  or  more,  return  should  be  made  by  the  executor 
or  administrator  of  the  deceased  as  of  the  date  of  his  death,  and  the 
executor  or  administrator  may  claim  an  exemption  of  $4,000.  The 
survivor  when  making  a  return  at  the  end  of  the  year  will  be  allowed 

exemption  for  single  or  married  status  existing  at  the  close  of  the 
year.  (T.  D.  2090.) 

Individuals  Presenting  Coupons  for  Collection  Without  Certificates 
Must  Establish  Their  Identity:  A  corporation  or  collection  agency  or 
any  person  first  receiving  from  the  owner  coupon  for  collection  of 
registered  interest  should  require  persons  tendering  such  coupons  to 
establish  their  identity.  (Article  52,  Reg.  33.) 

Permanent  Improvements  Made  Under  Rental  or  Leased  Contracts: 
Where,  under  terms  of  a  rental  or  leased  contract,  a  tenant  agrees  to 
erect  a  building  or  to  expend  during  the  rental  period  a  certain  fixed  sum 
in  making  improvements  upon  the  freehold  of  another,  it  is  held  for 
income  tax  purposes  that  the  building  or  permanent  improvement  be- 
comes a  part  of  the  realty  unless  otherwise  agreed  between  the  con- 
tracting parties;  and  as  such  shall  be  accounted  for,  without  having 
normal  tax  withheld,  as  gain  or  profit  to  the  lessor  in  the  value  of  his 
realty  at  the  termination  of  the  contract,  whether  terminated  by  expira- 
tion of  the  lease  or  otherwise. 

The  gain  or  profit  to  the  lessor  at  the  termination  of  the  lease  by 
expiration  or  otherwise  is  held  to  be  the  difference  between  the  cost 
of  the  building  or  improvements  and  a  reasonable  allowance  for  the 
exhaustion,  wear  and  tear  of  the  property  arising  out  of  its  use  or  em- 
ployment in  a  business  or  trade  during  the  period  of  its  life  under  the 
lease;  and  no  annual  deduction  for  depreciation  shall  be  allowed  during 
the  lease  term. 

As  the  use  of  the  building  or  permanent  improvement  by  tenant  dur- 
ing the  term  of  the  lease  is  a  part  of  the  consideration  of  the  contract, 
the  cost  may  be  pro-rated  by  the  tenant  over  the  lease  term  and  deducted 
at  an  annual  rate  as  a  part  of  "the  necessary  expenses  actually  paid  in 


146  TREASURY  DECISIONS 

carrying  on  any  business  or  trade,"  together  with  the  cost  of  incidental 
repairs  and  maintainance.  (T.  D.  2442.)  February  6th,  1917. 

Commissions  from  Renewal  Premiums  Considered  Income:  Com- 
missions on  renewal  premiums  for  insurance  are  income  for  the  period 
in  which  received. 

Where  returns  of  annual  net  incomes  were  not  made  by  individuals 
in  receipt  of  such  commissions  because  of  insufficient  income  to  require 
return  of  income,  and  such  showing  that  insufficient  income  is  caused 
by  the  exclusion  of  renewal  premiums,  such  individuals  should  make 
and  file  returns  of  income  and  include  therein  the  commissions  received 
by  them  on  renewal  premiums.  (T.  D.  2011.) 

Rent  Is  Returnable  as  Income  in  the  Year  Received:  Amount  of 
rent  received  from  real  property  should  be  included  in  any  personal 
annual  return  of  net  income.  The  landlord  may  be  required  to  render 
in  the  year  in  which  received,  and  deductions  may  be  claimed  on  ac- 
count of  any  expense  incurred  in  the  maintenance  of  said  property  or  its 
use  for  rental  purposes,  including  amount  paid  for  repairs,  insurance, 
fuel,  light,  etc.,  if  any,  and  in  addition,  an  amount  representing  a 
reasonable  allowance  for  wear  and  tear  of  the  property  arising  from 
its  use,  but  no  claim  for  depreciation  should  be  made  on  account  of 
any  amount  of  expense  in  restoring  property  or  making  good  exhaustion 
which  deduction  is  claimed  elsewhere  in  the  return. 

The  landlord  should  include  in  his  return  of  annual  net  income  the 
rents  actually  paid  to  him  during  the  year,  and  make  returns  as  of  the 
year  in  which  paid. 

Promissory  Note  Received  in  Payment  Equivalent  to  Cash  Settle- 
ment: The  receipt  of  a  promissory  note  in  settlement  of  an  account, 
and  so  much  of  the  amount  of  which  such  note  represents  net  income, 
is  subject  to  tax  in  the  year  received. 

Income  Accruing  to  Minor  Through  Natural  Guardian:  A  taxpayer 
is  required  to  account  only  for  the  actual  amount  received  from  the 
fiduciary. 

Proceeds  of  Sale  of  Rights  to  Subscribed  Stock:  The  income  tax 
law  levies  a  tax  upon  income  from  all  sources,  and  it  is  held  that  an 
individual  who  holds  stock  in  a  corportaion  by  reason  of  the  sale  of 
his  rights  to  new  stock  in  corporation,  is  an  item  to  be  assessed,  and 
should  be  included  in  return. 

Income  Tax:  For  the  purpose  of  deductions,  amounts  paid  to 
collector  and  amount  withheld  at  the  source  on  account  of  the  income 
tax,  are  held  to  be  paid  within  the  meaning  of  the  law  in  year  in  which 
assessment  was  made  and  tax  paid  to  collector.  (T.  D.  2135.) 

Taxes  Paid  by  Banks  on  Stock  Held  by  Individuals:  do  not  con- 
stitute allowable  deductions  from  gross  income  of  the  bank,  but  are 
allowable  deductions  in  return  of  individual.  (T.  D.  2135.) 

In  the  case  where  A  owns  a  number  of  shares  of  stock,  of  a 
bank  at  the  time  taxes  are  assessed  against  the  stockholders  of  the 
bank,  and  subsequently  he  sells  stock  to  B  prior  to  the  payment  of  the 
tax  by  the  bank  in  his  behalf,  B,  holding  this  stock  at  the  time  the  bank 
actually  pays  the  tax  for  stockholders,  the  taxes  which  were  assessed 
against  the  stock  while  in  A's  hands  and  became  due  and  payable  prior 
to  the  sale  to  B,  constitute  items  which  may  be  claimed  as  deductions 
by  A.  Taxes  due  and  payable  after  the  date  even  though  assessed 
against  the  stock  while  in  A's  hands,  constitute  items  allowable  as  de- 
ductions to  B. 

Income  Accrued:  It  is  held  income  accrues  to  the  individual  partner 
from  partnership  at  time  his  distributive  is  determined  and  reduced  to 
possession.  There  should  be  included  in  the  return  of  individuals 
accruing  to  them  from  business  of  partnerships  for  their  business  years 
such  a  sum  as  ascertained  by  means  of  book  balance,  whether  dis- 
tributed or  not.  (T.  D.  2090.) 


TREASURY  DECISIONS  147 

Income  of  Partnership  Not  to  Be  Withheld  at  Source:  The  pro- 
vision of  law  relating  to  the  deduction  and  payment  of  tax  at  the 
source  of  income  do  not  apply  to  the  income  of  partnerships.  Taxable 
members  of  partnerships  only  are  required  to  account  for  profits  accru- 
ing from  partnership.  (T.  D.  1957.) 

Materials,  Pro-Rating  Charges  for  Material  Used  and  on  Hand:  In 
ascertaining  expenses  proper  to  be  included  in  deductions  to  be  made 
under  items  of  "expenses,"  corporation  carrying  materials  and  supplies 
on  hand  to  use,  should  include  in  expenses  charges  for  materials  only 
to  amount  that  the  same  are  actually  disbursed,  and  used  during  year 
for  which  return  is  made.  (Art.  123,  Reg.  33.) 

Aggregate  of  Taxable  Income,  Including  Dividends,  Payable  to  a 
Beneficiary,  in  Excess  of  $3,000,  Returns  Should  iBe  Made:  Under  Act 
of  September  8th,  1916,  a  fiduciary  is  required  to  file  a  return  when  the 
amount  payable  to  any  one  beneficiary,  including  dividends,  is  $3,000 
or  over,  and  is  required  to  withhold  the  normal  tax  when  the  amount 
payable  to  any  one  beneficiary,  exclusive  of  dividends  and  income  on 
which  tax  has  been  withheld  at  source,  exceeds  $3,000.  (Commission 
W.  H.  Osborn,  January  4th,  1917.) 

Excess  Amounts  Received  at  Maturity  of  Series  of  Shares  in  a  Build- 
ing Association  on  Surrender  of  Life  Insurance  Policy  Constitute  Taxable 
Income:  The  difference  between  the  total  amount  received  for  the  sur- 
render of  a  matured  certificate  in  a  building  and  loan  association  and  the 
aggregate  of  deposits  made  by  the  certificate  holder  to  bring  that  certifi- 
cate to  maturity  is  the  amount  to  be  returned  as  gain  or  profit  when 
computing  income  tax  liability  for  the  year  for  which  certificate  is  sur- 
rendered. 

The  difference  between  the  amount  received  by  an  insurance  policy- 
holder  upon  the  maturity  or  surrender  of  the  policy  and  the  aggregate 
amount  of  premiums  paid  during  the  life  of  the  policy  constitutes  taxa- 
ble income,  it  should  be  included  in  any  personal  return  the  individual 
may  be  required  to  render  for  the  year  during  which  the  proceeds  of  the 
policy  are  received.  (From  letter  signed  by  Deputy  Commissioner  L.  F. 
Speer,  dated  February  8th,  1917.) 

Income  of  Persons  Dying  After  March  1st,  1913,  and  Prior  to  October 
3rd,  1913,  Liable  to  Tax:  The  income  of  a  person  dying  on  July  22nd, 
1913,  is  liable  to  tax.  The  tax  is  against  citizens  and  residents  of  the 
United  States  personally.  (Brady  v.  Anderson,  Collector  of  Internal 
Revenue,  May  21st,  1917.)  (T.  D.  2494.) 

Payments  of  Income  Made  in  Liberty  Loan  Bonds:  The  Attorney- 
General  holds,  in  part,  that:  "The  Act  of  April  24th,  1917,  provides  to 
the  bonds  thereby  authorized  that  the  principal  and  interest  thereof  shall 
be  exempt,  both  as  to  principal  and  interest  from  all  taxation,  except  the 
State  or  Inheritance  taxes,  imposed  by  authority  of  the  United  States  or 
its  possessions,  or  by  any  State  or  local  taxing  authority." 

Like  every  exemption  from  taxation,  this  provision  must  be  literally 
construed  and  cannot  be  extended  beyond  its  precise  terms.  It  protects 
an  owner  of  these  bonds  from  any  tax  of  whatever  character,  except  the 
State  or  Inheritance  taxes;  but,  a  tax  levied  upon  one's  net  income  or 
annual  gain  cannot  be  evaded  because  the  income  or  gain  happens  to  be 
liquidated  by  the  delivery  of  a  certain  number  of  these  bonds  or  other 
non-taxable  securities.  Such  a  tax  is  upon  the  income  itself  as  an  en- 
tirety, and  not  upon  the  specific  articles  to  which  this  income  is  finally 
transmitted.  When  these  bonds,  therefore,  are  used  as  a  medium  of  pay- 
ment, whether  in  the  discharge  of  a  private  or  a  corporate  dividend,  the 
profit  or  gain  to  the  recipient  is  nevertheless  subject  to  income  tax. 
(Deputy  Commissioner  L.  F.  Speer,  June  22nd,  1917.) 

Returns  of  Undistributed  Income:  Fiduciaries  having  control  of 
income  accruing  to  known  beneficiaries  other  than  trust  estates  as  pro- 
vided in  T.  D.  2231,  but  not  distributed  to  beneficiaries  during  the  year, 


148  TREASURY  DECISIONS 

shall  render  return  Form  1031,  giving  name  and  address  of  each  bene- 
ficiary having  a  distributed  interest  in  said  income.  In  all  such  cases, 
fiduciaries  shall  withhold  and  pay  collector  tax  upon  distributive  in- 
terest of  each  beneficiary  when  in  excess  of  three  thousand  dollars,  the 
same  as  if  the  income  was  distributed.  When  normal  tax  on  undivided 
income  has  been  so  withheld,  it  shall,  not  again  be  subject  to  tax  when 
actually  distributed,  but  beneficiary  should  account  for  same  in  his 
return  in  the  year  in  which  actually  received,  entering  in  Column  (a)  the 
amount  of  income  on  which  normal  tax  has  heretofore  been  paid. 
(T.  D.  2289.) 

Income,  Undistributed,  entered  on  Form  1041  by  Fiduciaries:  List- 
ing on  page  (1)  of  the  return  should  be  made  by  entering  the  name  of 
the  beneficiary  twice.  Opposite  one  such  entry  should  be  placed  amount 
actually  paid,  and  opposite  the  other,  amount  retained. 

Returns  in  Cases  of  More  Than  One  Trust  or  Estate:  A  fiduciary 
acting  for  a  beneficiary  in  more  than  one  estate  or  trust  required  to 
account  for  each  separately  and  if  amount  of  income  from  no  one  of  the 
estates  exceeds  three  thousand  dollars,  no  withholding  is  required. 
(T.  D.  2090.) 

In  such  case  a  single  return  on  Form  1041,  revised,  for  all  trusts 
in  his  hands  should  be  made.  Where  trustee  holds  different  trusts 
created  by  different  persons,  but  for  the  same  beneficiaries,  he  should 
make  returns  for  each  separately  on  Form  1041,  revised.  This  ruling 
is  based  upon  identity  of  creator  and  not  beneficiary.  (T.  D.  2137.) 

Income  Defined:  Miscellaneous  income  includes  income  derived 
from  salaries,  wages,  rents,  royalties,  interest,  taxable  annuities,  emolu- 
ments or  other  fixed  or  determinable  gains,  profits  and  income  of  an- 
other person,  such  as  payment  of  interest  upon  obligations  of  individ- 
uals. (T.  D.  2135.) 

Gross  Income  of  Insurance  Companies:  Consists  of  total  revenue 
derived  from  operation  of  business,  including  income,  gains,  or  profits 
from  all  other  sources,  as  shown  by  entries  on  books  of  accounts  within 
calendar  or  fiscal  year  for  which  return  is  made,  except  as  modified  by 
express  exemptions  of  articles  which  apply  to  Mutual  Fire,  Mutual  Ma- 
rine and  Life  Insurance  Companies.  (Art.  97,  Reg.  33.) 

Sinking  Fund  Increment  Is  Taxable  Income:  In  cases  where  cor- 
porations set  aside  and  place  in  a  sinking  fund  under  control  of  Trustees 
their  own  bonds  or  bonds  of  other  corporations  which  they  may  own, 
it  is  held  that  such  fund  and  that  any  increment  to  that  fund  as  a 
result  of  investments  made  by  trustees  having  same  in  charge  is  in- 
come to  corporation  and  should  be  included  in  its  return  as  part  of 
annual  net  income. 

If  trustees  have  invested  the  amount  of  the  sinking  fund  reserve, 
or  any  portion  of  it,  in  the  bonds  of  the  corporation  and  such  corpo- 
ration pays  to  the  trustees  the  interest  on  these  bonds,  such  corporation 
will  be  permitted  to  deduct  such  interest  from  its  gross  income,  pro- 
vided the  amount  of  interest  thus  paid  plus  interest  on  any  other  out- 
standing indebtedness  which  it  may  have,  does  not  exceed  limit  fixed  by 
the  law.  and  provides  further  that  interest  paid  to  trustees,  together  with 
all  other  earnings  on  investment  of  sinking  fund,  made  by  the  trustees, 
is  included  in  income  of  the  corporation  (T.  D.  2161.) 

Royalties  Received  From  Lessees  are  Income:  Von  Baumbach,  Col- 
lector of  Internal  Revenue,  Petitioner,  vs.  Sargent  Land  Company;  same 
vs.  Sutton  Land  Company,  219  Fed.  31,  January  15th,  1917;  same  vs.  Kear- 
sarge  Land  Company. 

These  three  cases  were  argued  and  submitted  together  and  involved 
practically  the  same  facts.  These  suits  were  brought  by  the  corpora- 
tions, named  in  the  United  States  District  Courts  for  the  District  of 
Minnesota  against  the  Collector  of  Internal  Revenue  to  recover  certain 
taxes,  paid  under  protest,  assessed  under  the  Corporation  Tax  Law  of 
1909  for  the  years  1909,  1910  and  1911. 


TREASURY  DECISIONS  149 

The  appellants  were  corporations  who  owned  lands  which  they 
leased  to  others  for  the  purpose  of  mining  the  natural  deposits  therein 
for  the  consideration  of  a  certain  sum  of  money  for  each  ton  to  be 
removed  from  said  land. 

The  companies  were  assessed  upon  their  gross  income,  being  the 
entire  receipts  of  the  companies  from  royalty  on  the  leases  collected  for 
the  years  1909,  1910,  1911,  and  some  sums  received  for  the  sale  of  lots, 
land  and  stumpage,  from  which  expenses  and  taxes  were  deducted,  but 
no  deduction  was  made  upon  account  of  the  depletion  of  the  ore  in  the 
properties,  or  on  account  of  such  sales.  The  appellants  contended  that 
moneys  received  by  them  during  those  years  in  payment  for  iron  ore, 
under  the  contracts  covering  their  mineral  lands,  represented  the  con- 
version of  the  investment  of  the  corporation  from  ore  into  money,  and 
that  if  such  moneys  were  gross  income  they  are  entitled  to  make  deduc- 
tion therefrom  on  account  of  depletion  of  their  capital  investment. 

The  court  held  that  the  payments  made  by  the  lessees  to  the  cor- 
poration were  in  substance  the  proceeds  of  an  outright  sale  of  a  mining 
property,  but  in  view  of  the  terms  of  the  instrument,  were,  in  fact,  rents 
or  royalties  to  be  paid  upon  entering  into  the  premises,  discovering, 
developing  and  removing  the  mineral  resources  thereof,  and  such  come 
within  the  term  income  as  intended  to  be  reached  and  taxed  under  the 
terms  of  the  Corporation  Tax  Act. 

The  statute  permits  deduction  of  "all  losses  sustained  within  the 
year,  including  a  reasonable  allowance  for  depreciation  of  property." 

What  was  here  meant  by  "depreciation  of  property?" 

We  think  Congress  used  the  expression  in  its  ordinary  and  usual 
sense  as  understood  by  business  men.  We  do  not  think  Congress  in- 
tended to  cover  the  necessary  depreciation  of  the  mine  by  exhaustion  of 
the  ores  and  determining  the  income  to  be  assessed  under  the  statute 
by  including  such  exhaustion  within  the  allowance  made  for  depreciation. 
It  would  be  a  strange  use  of  the  term  "Depreciation"  to  say  that,  where 
ore  is  taken  from  a  mine  in  the  operation  of  the  property,  depreciation, 
as  generally  understood  in  business  circles,  follows.  True,  the  value  of 
the  mine  is  lessened  from  partial  exhaustion  of  the  property,  and  owing 
to  its  peculiar  character,  cannot  be  replaced.  But  in  no  accurate  sense 
can  such  exhaustion  of  the  body  of  the  ore  be  deemed  depreciation.  It 
is  equally  true  there  seems  to  be  a  hardship  in  taxes,  such  receipts  as 
income,  without  some  deduction  arising  from  the  fact  that  the  mined 
property  is  being  continually  reduced  by  the  removal  of  the  minerals. 
But  such  consideration  will  not  justify  this  court  in  attributing  to  depre- 
ciation the  sense  which  we  do  not  believe  Congress  intended  to  give  to  it 
in  the  act  of  1909." 

Taxability  of  Income  Accruing  to  Decedent  Dicing  After  March  1, 
1913,  but  Before  October  3,  1913:  Nicholas  F.  Brady  et  al.  vs.  Chas.  W. 
Anderson  (late  Collector  of  Internal  Revenue),  U.  S.  Circuit  Court  of 
Appeals,  February  8,  1917. 

This  is  an  action  against  the  Collector  of  Internal  Revenue  by  the 
executors  of  Anthony  N.  Brady,  deceased,  to  recover  taxes  assessed  by 
the  commissioner  and  paid  under  protest  upon  income  received  by 
Brady  during  his  lifetime  before  the  income  tax  act  of  October  3,  1913, 
imposing  a  tax,  had  been  passed. 

Anthony  N.  Brady  died  July  22,  1913,  and  his  executors,  in  accord- 
ance with  the  requirement  of  the  Commissioner  of  Internal  Revenue, 
made  a  return  of  the  income  received  by  him  between  March  1,  when 
the  act  went  into  effect,  and  July  22,  1913,  when  he  died.  The  com- 
missioner assessed  a  tax  of  $61,654.72. 

The  plaintiffs  contend  that  the  tax  is  against  persons  who  are  citi- 
zens or  residents  of  the  United  States. 

The  Government  contends  that  the  tax  is  upon  the  property  and 
not  upon  the  person,  which  is  the  view  taken  by  the  trial  judge. 


150  TREASURY  DECISIONS 

The  plaintiffs  argue  that  Brady,  having  died  July  22,  was  neither  a 
citizen  or  resident  of  the  United  States  October  3,  1913,  at  the  time  the 
act  was  passed.  Its  language  does  not  authorize  the  collection  of  any 
tax  upon  income  received  by  him.  On  the  other  hand,  the  Government 
says  that  as  the  tax  is  upon  the  property,  it  makes  no  difference  whether 
Brady  was  living  or  dead  at  that  time. 

The  court  held  that  the  tax  is  against  citizens  and  residents  of  the 
United  States  personally.  They  are  chargeable  in  respect  to  income 
received  by  him.  The  statement  that  the  tax  is  upon  this  income  does 
not  create  an  obligation  in  rem.  It  is  only  a  way  of  saying  that  the 
owner  is  taxable  with  reference  to  the  income.  Taxable  persons  are 
spoken  of  throughout  the  act. 

The  effect  of  making  the  act  retroactive  is  to  apply  it  to  Brady 
exactly  as  if  it  had  been  enacted  March  1,  1913,  and  as,  by  reason  of  his 
death,  he  cannot  make  a  return,  his  executors,  into  his  hands  his  estate 
has  come,  must  do  so. 

Indebtedness,  Compromise  of:  In  a  case  where  a  company  has 
been  unable  to  pay  any  interest  on  its  indebtedness  for  some  years 
proposes  to  settle  that  indebtedness,  part  in  new  securities  and  part  in 
cash,  the  creditors  to  reduce  the  face  of  the  bonds  by  $100,000.00  as  an 
inducement  for  raising  $100,000.00  cash.  And  by  this  process  the  ap- 
parent financial  condition  of  the  debtor  company  is  improved  by  $100,- 
000.00,  not  through  any  earnings,  but  by  effecting  settlement  with  its 
creditors  by  which  $200,000.00  of  its  bonds  are  cancelled  at  a  cost  to  it 
of  $100,000.00  in  cash,  thus  liabilities  being  reduced  $100,000.00,  it  is 
held  that  such  gain  in  the  reduction  of  its  indebtedness  is  taxable.  Such 
deduction  in  indebtedness  constituting  income  may  be  prorated  over 
period  elapsing  between  the  date  of  issue  and  payment  of  said  bond*. 
(Commissioner  W.  H.  Osborn,  July  the  10th,  1915.) 

Indebtedness,  Interest  Accrued  and  Paid  on:  "Paid-up  capital  stock 
outstanding  at  the  close  of  the  year,"  when  used  in  connection  with 
"interest  bearing  indebtedness,"  to  determine  maximum  principal  upon 
which  interest  for  purpose  in  authorized  deduction  is  to  be  computed, 
meaning  the  par  value  of  shares  issued  as  reported  in  item  1  of  return 
form,  and  will  not  include  surplus  carried  by  corporations.  (T.  D.  2090.) 

Full  amount  of  stock  as  represented  by  the  par  value  of  shares 
issued  is  to  be  regarded  as  the  paid-up  capital  stock,  except  when  such 
stock  is  assessable  on  account  deferred  payments,  or  payable  in  install- 
ment, in  which  case  the  amount  actually  paid  on  such  shares  will  con- 
stitute the  actual  paid-up  capital  stock  of  the  corporation.  (Art.  95, 
Reg.  33.) 

The  interest  to  be  deductible  must  have  been  computed  on  proper 
principal  at  contract  rate  when  actually  paid  within  the  year. 

Interest  paid  pursuant  to  contract  on  an  indebtedness  secured  by 
mortgage  on  real  estate  occupied  and  used  by  a  corporation,  in  which 
real  estate  the  corporation  has  no  equity  or  to  which  it  is  not  taking 
title,  is  an  allowable  deduction  from  gross  income  as  rentals  charge,  pay- 
ment of  which  is  required  to  be  made  as  a  condition  to  the  continued 
use  and  possession  of  the  property.  If,  however,  the  corporation  has  an 
equity  in  or  is  purchasing  for  its  own  use  the  real  estate  upon  which 
the  mortgage  is  a  prior  lien,  the  indebtedness  will  be  held  to  be  the 
indebtedness  of  the  corporation  within  meaning  of  law,  and  the  interest 
paid  on  such  mortgage  will  be  deductible  only  to  that  extent  by  it,  with 
interest  on  other  obligations  of  the  corporation,  within  limits  fixed  by 
the  act.  (Art.  148,  Reg.  33.) 

It  is  held  that  in  case  of  a  corporation  having  capital  stock,  this 
deductible  interest  is  interest  actually  accrued  and  paid  within  the  year, 
on  an  amount  of  an  indebtedness  not  exceeding  the  paid-up  capital  stock 
outstanding  at  the  close  of  the  year,  increased  by  the  addition  thereto  of 
one-half  the  interest  bearing  indebtedness  outstanding  at  the  close  of 
the  year. 


TREASURY  DECISIONS  151 

If  no  indebtedness  is  outstanding  at  the  close  of  the  year,  the  maxi- 
mum deduction  allowable  on  account  of  interest  paid  will  be  amount  of 
interest  actually  accrued  and  paid  on  amount  of  indebtedness  not  exceed- 
ing at  any  time  within  the  year,  the  entire  paid-up  capital  stock  outstand- 
ing at  the  close  of  the  taxable  year,  that  is,  in  such  case,  the  paid-up 
capital  stock  outstanding  at  the  close  of  the  year,  measures  highest 
amount  of  indebtedness  upon  which  deductible  interest  can  be  computed. 
For  the  purpose  of  an  allowable  deduction,  interest  on  the  maximum 
amount  of  indebtedness,  determined  in  the  manner  above  indicated,  can 
be  computed  upon  such  amount  only  for  the  time  during  which  such 
amount  of  indebtedness  is  not  in  excess  of  paid-up  capital  stock  increased 
by  one-half  the  sum  of  interest  bearing  indebtedness  outstanding  at  the 
close  of  the  year. 

In  any  event  amount  of  interest,  in  order  to  constitute  an  allowable 
deduction,  must  not  only  be  within  the  limit  of  the  law  as  herein  defined, 
but  must  have  actually  accrued  and  been  paid  within  the  year  for  which 
return  is  made.  (T.  D.  1960.) 

Bonded  and  Other  Indebtedness:  Indebtedness  to  be  included  under 
item  two  of  the  return  is  all  interest-bearing  collateral,  subject  of  sale 
in  the  ordinary  business  of  the  corporation.  (T.  D.  2137.) 

Amount  of  interest-bearing  indebtedness  of  a  corporation  outstanding 
at  the  close  of  the  year,  should  be  reported  under  item  two  of  the  return 
form  1031  whether  the  interest  accrued  upon  such  indebtedness  was 
actually  paid  during  the  year  or  not.  (T.  D.  2137.) 

Inheritance  Taxes:  It  is  held  that  collateral  inheritance  taxes  levied 
under  the  laws  as  a  charge  against  the  corpus  of  the  estate,  does  not 
constitute  an  allowable  deduction,  and  in  computing  tax  liability,  to 
either  the  estate  or  the  beneficiary  thereof. 

Initials,  Use  of  Authorized:  In  writing  the  name  at  top  of  certifi- 
cate, initials  may  be  used.  (T.  D.  1920.) 

Accident  Insurance:  Money  paid  to  person  insured  by  an  accident 
policy,  on  account  of  accident  sustained,  is  returnable  as  gross  income 
by  insured  persons.  The  proceeds  of  accident  insurance  policies  paid 
upon  the  death  of  the  person  insured  to  the  beneficiary,  is  treated  like 
the  proceeds  of  life  insurance  policies.  (T.  D.  2135.) 

Insurance,  Life  and  Fire  Premiums:  Premiums  paid  on  property 
leased  constitutes  allowable  deduction  in  computing  net  income.  Pre- 
miums paid  on  life  insurance  by  the  insured,  do  not  constitute  allowable 
deduction.  (T.  D.  2090.) 

Life  Insurance  Carried  by  Partnership  on  Lives  of  Individual  Mem- 
bers: Premiums  paid  on  life  insurance  taken  out  by  partnership  on  lives 
of  individual  members  constitute  allowable  deductions  in  ascertaining 
net  income  of  partnership.  Upon  death  of  insured  partner  amount 
received  as  life  insurance  should  be  included  in  gross  income  of  part- 
nership. (T.  D.  2090.) 

Mutual  Fire  Insurance  Companies  which  require  members  to  make 
premium  deposits  to  provide  for  losses  and  expenses,  shall  not  return 
as  gross  income  any  portion  of  premium  deposits  returned  to  their 
policy  holders,  but  shall  make  return  for  income  received  from  all 
sources  plus  such  portion  of  premium  deposits  as  are  retained  by  Com- 
panies for  purpose  other  than  payment  of  losses  and  expenses  and  re- 
insurance reserves.  (Art.  98,  Reg.  33.) 

All  assessments  received  by  Mutual  Fire  Insurance  Companies  and 
not  returned  to  policy  holders,  but  retained  for  other  purposes  than 
paying  losses  and  expenses  incurred  during  year  for  which  return  is 
made,  are  taxable  income. 

Therefore,  if  Mutual  Fire  Insurance  Companies  retain  out  of  mon- 
eys received  on  account  of  assessments  an  amount  in  excess  of  losses, 
expenses  and  re-insurance  reserves  of  any  particular  year,  that  excess, 
plus  amount  received  from  any  other  source,  will  be  considered  net  in- 
come upon  which  tax  shall  be  assessed.  (T.  D.  2161.) 


152  TREASURY  DECISIONS 

Mutual  Marine  Insurance  Companies  may  include  in  their  deduc- 
tions from  gross  income  amounts  repaid  to  policy  holders  on  account 
of  premiums  paid  by  them  and  interest  paid  upon  such  amounts  between 
ascertainment  thereof  and  payment  thereof,  such  amounts  and  interests 
having  been  included  in  gross  income.  (Art.  99,  Reg.  33.) 

Life  Insurance  Companies  authorized  to  omit  from  gross  income 
such  portion  of  any  premium  received  from  any  individual  policy  hold- 
er as  shall  be  paid  back  or  credited  to  policy  holder  or  treated  as  an 
abatement  of  his  premium.  Insofar  as  "deferred  dividends"  payable  at  a 
stated  period  "a  portion  of  any  actual  premiums  received."  such  de- 
ferred dividends  may  be  included  in  amount  to  be  omitted  from  gross 
income  for  year  in  which  actually  paid  back,  or  credited  to  policy 
holder,  or  applied  as  an  abatement  of  premium.  In  case  of  dividend 
credited  or  apportioned  annually  to  policy  holder,  only  aggregate 
amount  so  actually  credited,  and  not  any  accretions  thereto,  can  be 
excluded  from  gross  income.  In  case  of  whole-life  or  five-year  dis- 
tribution policies,  deferred  dividends  may  be  excluded  from  gross  in- 
come to  the  extent  they  are  paid  back,  or  credited  to  insured.  (Art. 
100,  Reg.  33.) 

Gross  Income  of  Insurance  Companies  will  include  net  premium 
income  as  reported  to  State  Insurance  Department,  except  that  fore- 
going items  specifically  exempted,  in  act,  and  in  case  of  Life  Insurance 
Companies  surrender  values  applied  in  any  manner,  consideration  for 
supplementary  contracts  involving  and  not  involving  life  contingencies, 
and  all  other  income  as  shown  by  books  of  accounts.  (Art.  101,  Reg.  33.) 

Applied  surrendered  values  and  consideration  for  supplementary  con- 
tracts not  involving  contingencies  included  in  income  will  be  deducted 
as  payment  under  policy  contracts,  but  for  convenience  in  verifying 
returns,  these  items  should  appear  in  both  gross  income  and  deduction. 
(Art.  102,  Reg.  33.) 

Proceeds  of  Life  Insurance  in  Favor  of  Corporations:  Where  cor- 
porations pay  premiums  on  insurance  policies  insuring,  in  favor  of  cor- 
poration, the  lives  of  officers  or  others,  such  premiums  may  be  allow- 
ably deducted  from  gross  incomes  of  corporations  paying  same. 

In  all  such  cases,  proceeds  of  policies  when  paid  at  maturity  or 
upon  death  of  insured  shall  be  returned  by  corporation  as  income  for 
year  in  which  proceeds  were  received.  (T.  D.  2090.) 

Insurance  Companies:  Assessments.  In  the  case  of  assessment, 
insurance  companies,  the  actual  deposited  sums  with  State  or  territorial 
officers  pursuant  to  law  as  additions  to  guarantee  or  reserve  fund  shall 
be  treated  as  payment  required  by  law  to  reserve  fund.  (Art.  147, 
Reg.  33.) 

Insurance  Companies:  Supplementary  Statement  by:  All  insur- 
ance companies  should  include  and  attach  to  their  returns  a  sup- 
plementary statement  showing,  for  Life  Companies,  the  aggregate 
items  "of  such  portion  of  any  actual  premiums  received  from  any  indi- 
vidual policyholder  as  shall  have  been  paid  back  or  credited  to  such 
individual  policyholder  within  such  year";  in  case  of  Mutual  Fire  Insur- 
ance Companies  a  statement  showing  "any  portion  of  the  premium 
deposits  returned  to  their  policyholders";  and  in  the  case  of  Mutua' 
Marine  Companies,  "amounts  paid  to  policyholders"  on  account  of 
premiums  previously  paid  by  them,  and  interest  paid  upon  such  amount? 
between  the  ascertainment  thereof  and  payment  thereof,  which  are,  or 
may  be,  omitted  from  gross  income.  (Art  103,  Reg.  33.) 

Premiums  Paid  to  Insurance  Companies  on  Policies  Maturing  it 
Favor  of  Corporations,  Lives  of  Officers  or  Employees,  and  Not  Here 
after  Deductible  From  Gross  Income  but  to  the  Extent  That  Such 
Premium  Payments  Have  Not  Been  Previously  Deducted  From  Gross 
Income  in  Any  Return  of  Annual  Net  Income  May  Be  Deducted  From 
the  Proceeds  of  the  Policy  When  Such  Proceeds  Are  Received,  the  Net 
Proceeds  Being  Returned  as  Income:  T.  D.  2090  in  so  far  as  it  author- 


TREASURY  DECISIONS  153 

izes  corporations  to  deduct  from  gross  income  the  annual  premiums 
paid  on  policies  insuring  the  lives  of  officers  or  employees  in  favor  of 
such  corporation  is  hereby  modified  to  the  extent  that  instead  of  the 
corporation  carrying  such  insurance,  being  permitted  to  deduct  from 
gross  income  of  the  year  in  which  paid,  the  amount  of  the  annual 
premium  payments,  they  will  hereafter  be  permitted  to  deduct  from 
the  gross  proceeds  when  received  of  any  policies  of  which  the  corpora- 
tions are  the  beneficiaries,  the  entire  amount  of  the  premiums  paid 
during  the  term  of  the  policies,  less  any  premium  payments,  which  under 
the  former  ruling,  have  been  deducted  from  gross  income  in  any  return 
of  annual  net  income,  and,  the  net  proceeds  of  the  policies,  thus  ascer- 
tained, shall  be  returned  as  taxable  income  of  the  year  in  which  re- 
ceived. (T.  D.  2519.) 

Interest   Payments   on   Commercial   Paper   of   Corporations:     Are 

subject  to  withholding  at  source  only  when  payment  to  any  one  indi- 
vidual within  taxable  year  exceeds  $3,000.  On  all  other  obligations  of 
corporations  payments  are  subject  to  withholding  regardless  of  amount 
of  payment.  (T.  D.  2090.) 

Notes  for  Interest:  Where  note  is  given  in  payment  of  interest, 
payor  should  withhold  normal  tax  on  entire  amount  of  note,  if  in 
excess  of  $3,000.  If  exemptions  of  the  difference  are  claimed,  tax  should 
be  withheld  only  on  amount  of  said  note  in  excess  of  such  claim. 

If  any  person  has  purchased  or  discounted  any  such  notes,  omitted 
in  acquiring  them  from  previous  holders,  to  make  deductions  of  tax,  he 
can  look  only  to  person  from  whom  notes  were  obtained,  as  the 
(debtor)  is  required  to  deduct  and  pay  to  the  Collector  of  Internal 
Revenues  the  amount  of  the  normal  tax  which  may  be  due  thereon. 
(Art  68,  Reg.  33.) 

Coupon  Interest,  Accruing  Prior  to  Incidents  of  Tax:  Where  cou- 
pons bear  date  prior  to  March  1st,  1913,  but  not  presented  for  payment 
until  1915,  although  funds  have  been  on  fund  to  meet  same  since  ma- 
turity, no  withholding  required  for  reason  that  such  coupons  represent 
income  due  and  payable  and  could  have  been  reduced  to  possession  on 
demand,  prior  to  incidents  of  tax  law. 

Where  coupons  payable  in  1911  and  have  been  in  default  since  that 
year,  funds  to  meet  same  having  been  deposited  with  withholding  agent 
since  January  1st,  1915,  held  that  income  represented  by  such  coupons 
accrue  to  owners  of  bonds  prior  to  incidents  of  tax,  and  does  not 
constitute  taxable  income. 

Interest  on  Bonds  of  Exempt  Organizations:  Interest  on  such 
bonds  should  be  accounted  for  by  owner  if  said  owner  is  taxable  person 
or  corporation.  (Commissioner  of  Internal  Revenue.) 

Interest  on  Bonds  Bearing  Tax  Free  Covenants:  Under  the  provi- 
sions of  this  act,  corporations  must  return  as  income  the  full  amount 
of  interest  received  on  bonds,  although  such  bonds  may  contain  a  tax 
free  covenant;  that  is,  a  covenant  in  which  debtor  corporation  agrees 
to  pay  any  tax  assessed  on  bonds  or  income  therefrom.  And  since 
there  is  no  specific  provision  in  law  excluding  or  deducting  the  gross 
income  interest  upon  bonds  of  this  character,  receiving  corporation  can- 
not omit  or  deduct  such  interest  from  its  gross  income,  and  same  will 
necessarily  be  reflected  in  net  income  upon  which  tax  is  computed. 
(T.  D.  2167.) 

Interest  received  by  a  corporation  on  bonds  by  terms  of  which 
debtor  corporation  is  required  to  pay  any  tax  which  may  be  assessed 
thereon  must  be  returned  by  corporation  receiving  the  same  as  part  of 
its  gross  income,  notwithstanding  the  fact  that  debtor  corporation  may 
have  withheld  and  paid  tax  on  such  interest,  receiving  corporation  is 
not  permitted  to  deduct  from  its  gross  income  the  amount  of  intereit 
upon  which  this  tax  may  have  been  paid.  (T.  D.  2137.) 


154  TREASURY  DECISIONS 

Interest  on  bonded  indebtedness,  or  other  indebtedness  bearing  dif- 
ferent rates  of  interest,  may  be  deducted  from  gross  income  during  the 
year,  provided  the  aggregate  amount  of  such  indebtedness  on  which  in- 
terest is  paid  does  not  exceed  the  limit  prescribed  by  law,  and  in  case  the 
indebtedness  is  in  excess  of  amount  on  which  interest  may  be  legally 
deducted  an  indebtedness  bearing  highest  rate  may  be  first  considered 
in  computing  the  interest  deduction  and  the  balance,  if  any,  will  be 
computed  upon  the  indebtedness  bearing  the  next  lowest  rate  actually 
paid,  and  so  on,  until  interest  on  the  maximum  principal  allowed  has 
been  computed.  (Art.  151,  Reg.  33.) 

Interest  on  Government,  Etc.,  Bonds  Credited  to  Partnership  Is 
Deductible  Even  Though  Bonds  Are  Deposits  as  Collateral  for  Loan,  the 
Interest  Paid  on  Which  Is  Deductible  as  Partnership  Expense:  Members 
of  partnerships  dealing  in  municipal  bonds  may  exclude  from  the  net 
distributive  interests  their  proportionate  shares  received  by  partnership 
from  interest  on  municipal  bonds  notwithstanding  bonds  are  deposited 
as  collateral  for  loan  upon  which  interest  paid  is  deducted  as  expense 
of  partnership  business,  there  being  no  connection  for  income  tax  pur- 
poses between  interest  paid  as  business  expense  and  interest  received 
from  municipal  bond,  but  for  purpose  of  exclusion,  municipal  interest 
must  be  actually  received  or  credited  to  partnership.  (From  letter  signed 
by  Acting  Commissioner  David  A.  Gates,  January  25th,  1917.) 

Judgment  Paid  for  Infringement  of  Trade  Name  and  Amount  Paid 
in  Satisfaction  of  Suit  for  Interest  on  the  Judgment:  A  corporation  was 
sued  for  infringing  a  trade  name  covering  a  period  ending  in  1912.  Judg- 
ment was  obtained  1916.  The  Treasury  Department  holds  that  the 
amount  of  this  judgment  should  be  pro-rated  over  the  period  ending  in 
1912  according  to  the  income  of  each  year.  Such  part  of  it  as  by  this 
method  is  found  applicable  to  the  income  of  the  corporation  from  the 
period  of  1909  to  1912,  would  be  referable  to  those  years,  but  no  part  of 
this  sum  would  be  deductible  in  return  of  income  for  1916. 

The  same  corporation  also  paid  in  1916  an  additional  sum  as  con- 
sideration for  dismissal  on  a  pending  suit  for  interest  on  the  above 
judgment  from  the  date  of  decision  of  the  Circuit  Court  of  Appeals  to  the 
date  of  payments,  and  for  the  unrestrained  use  of  the  trade  name  in 
question.  It  is  held  that  if  this  amount  "can  be  segregated  between 
interest  and  use,  it  would  be  treated  the  same  as  another  case  would, 
for  the  period  subsequent  to  1912,  and  such  part  thereof  as  shall  be  thus 
found  applicable  to  the  1916  income  would  be  deductible  in  the  return 
of  income  for  that  year.  Under  the  respective  heads  of  "business  ex- 
pense and  interest,"  and  if  segregation  has  not  been  or  cannot  be  made, 
the  amount  may  be  treated  as  "business  expense"  "to  be  pro-rated  as 
above  indicated."  (Commissioner  W.  H.  Osborn,  February  9th,  1917.) 

Interest  Received  and  Paid  by  Brokers  in  Connection  With  Pur- 
chase and  Carrying  of  Securities  for  Customers:  A  corporation  which 
did  a  brokerage  business  and  bought  securities  for  its  customers  who 
paid  only  a  part  of  the  purchase  price,  paying  interest  on  balances, 
the  corporation  also  paying  for  the  securities  purchased  only  part 
of  the  purchase  price  and  owing  balances  on  which  it  paid  interest, 
including  in  return  of  gross  income  the  difference  between  the  inter- 
est received  and  the  interest  paid,  made  incorrect  return.  The  inter- 
est received  by  plaintiff  from  its  customers  should  be  included  in  gross 
income. 

Interest  paid  by  plaintiff  on  said  purchases  is  allowable  as  in- 
terest payable  on  its  bonded  or  other  indebtedness.  In  determining 
net  income,  interest  can  be  deducted  only  to  an  amount  not  exceeding 
the  paid  up  capital  stock  outstanding  at  the  close  of  the  year.  (Altheim- 
er  &  Rawlings  Investment  Co.  v.  Allen,  T.  D.  2441,  Feb.  15,  1917.) 

Interest  on  Bank  Deposits  in  United  States  to  Credit  of  Non-Alien 
Individuals  or  Corporations  Having  No  Place  of  Business  or  Office  in 
This  Country  Is  Returnable  Income,  But  the  Tax  Is  Not  to  Be  Deducted 


TREASURY  DECISIONS  155 

at  the  Source  and  No  Return  Need  Be  Made  by  the  Bank  to  Depositor 
on  Account  of  the  Interest:  Interest  paid  on  such  deposits  is  subject  to 
tax  under  the  provisions  of  the  Income  Tax  Law,  December  8th,  1916, 
whether  received  by  non-resident  alien,  or  foreign  corporation  having  no 
office  or  place  of  business  in  the  United  States,  and  must  be  included  in 
the  recipient's  income  tax  return  rendered  for  the  year,  during  which 
received  or  credited  to  an  account  against  which  the  recipient  may  draw. 
Banks,  bankers,  trust  companies,  or  other  banking  institutions  receiving 
deposits  of  money  are  not  required  to  withhold  at  the  source  the  normal 
income  tax  on  interest  paid,  or  accrued,  on  the  amount  deposited;  nor  is 
a  banking  institution  required  under  the  terms  of  the  act  of  December  8th, 
1916,  to  make  any  return  covering  amount  of  interest  paid  to  any  depos- 
itor. (Commissioner  David  A.  Gates,  June  29th,  1917.) 

Interest  Accrued  on  Bonds  at  Time  of  Sale  or  Purchase:  The  owner 
of  bonds  at  the  time  the  interest  becomes  due  and  payable,  should  only 
account  in  his  return  for  interest  which  accrued  after  the  bonds  were 
purchased  by  him.  The  former  owner  should  account  in  his  return  for 
interest  which  accrued  during  his  ownership  of  bonds. 

Bonds  Purchased  With  Accrued  Interest:  The  act  of  October  3rd, 
1913,  provided  various  methods  of  relief  in  the  case  of  a  taxpayer  who 
has  had  the  normal  tax  on  one  per  cent  withheld  at  the  source  to  an 
amount  in  excess  of  his  total  tax  liability. 

A  claim  for  the  amount  of  accrued  interest  paid  to  the  previous 
holder,  as  an  allowable  deduction,  the  law  does  not  provide  for  such  a 
contingency;  and  the  item  does  not  appear  to  fall  within  the  designation 
"interest  paid  within  the  year  by  taxable  person  upon  indebtedness." 

A  return  in  the  form  outlined  on  Form  1040,  (revised)  will  result 
in  showing  correctly  the  income  in  which  the  tax  is  to  be  assessed  by 
this  office,  or  the  amount  withheld  at  the  source  in  excess  of  the  indi- 
vidual's liability. 

Coupon  Interest  Accruing  Prior  to  Incidence  of  Tax:  Where  cou- 
pons bear  a  date  prior  to  March  1st,  1913,  but  have  not  been  presented 
for  payment  until  1915,  although  funds  have  been  on  hand  to  meet  them 
since  maturity,  withholding  not  required,  for  the  reason  that  income 
was  due  and  payable,  and  could  have  been  reduced  to  possession  prior 
to  Incidence  of  Income  Tax  Law. 

Materials   and   Merchandise,   Inventory   of:     In    order   that   certain 

classes  of  corporations  may  arrive  at  their  correct  income,  it  is  neces- 
sary that  inventory  of  the  merchandise  at  the  close  of  each  year  shall 
be  made  in  order  to  determine  the  gross  income  or  the  expense  of 
operation. 

Physical  inventory  is  preferred,  but  where  this  is  impossible,  an 
equivalent  inventory,  equally  accurate,  will  be  acceptable.  An  equiva- 
lent inventory  is  an  inventory  of  merchandise  on  hand  taken  from 
books  of  corporation.  (Art.  161,  Reg.  33.) 

Tax  Liability  on  Foreign  Investments  Computed  on  Rates  of  Ex- 
change at  Time  It  Was  Credited:  It  is  proper  for  the  individual  to 
return  each  item  of  income  at  the  rate  of  exchange  on  the  date  it  was 
credited  to  his  account. 

Joint  Owners  of  Rented  Property  do  not  desire  to  claim  exemption 
allowed  by  paragraph  (c)  of  Income  Tax  Law  and  merely  wish  to  file 
statements  with  lessees  that  will  show  proportionate  interests  of  joint 
owners  in  order  that  normal  tax  may  be  properly  deducted,  if  amounts 
are  such  as  render  deduction  necessary  from  income  accruing  to  indi- 
viduals, desired  information  may  be  imparted  to  withholding  agent  by 
use  of  office  certificate  1000,  revised. 

Under  these  circumstances  any  statement  of  joint  ownership  that 
will  be  made  to  the  lessees  will  be  acceptable  to  this  office.  (T.  D. 
2137. 


156  TREASURY  DECISIONS 

Landlord  and  Tenant:  Landlord  in  receipt  of  annual  rental  from  a 
tenant  in  excess  of  $3,000  may  at  time  of  rental  payments  file  with 
tenant  a  claim  of  exemption  under  paragraph  (c)  of  Income  Tax  Law. 
(Form  1007,  revised.) 

He  may  also  after  December  1st,  of  the  taxable  year,  file  with 
tenant  or  with  the  Collector  of  Internal  Revenue,  a  claim  for  deduction 
under  paragraph  (b)  on  Form  1008,  revised.  (T.  D.  2090.) 

Record  of  Leases:  In  making  examination  of  records  of  leases,  all 
leases  of  property  from  which  rental  is  less  than  $2,000  should  be 
ignored.  In  case  lease  shows  a  rental  in  excess  of  $3,000,  and  if  records 
fail  to  show  that  neither  filed  the  withholding  return,  steps  should  be 
taken  to  secure  proper  return.  (Letter  No.  8  to  Internal  Revenue 
Agents.) 

Lessee,  Liability  of,  Under  Terms  of  Lease  to  Pay  Tax  on  Rentals 
Received  by  Lessor:  Little  Schuylkill  Nav.  R.  R.  &  Coal  Co.  vs.  P.  &  R. 
Ry.  Co.  (Common  Pleas  Court,  Philadelphia  County,  Pa.,  44  Pa.  County 
Court  Reports  197.) 

The  court  holds  in  this  case  that  where  a  railroad  lease  provides 
that  the  lessee  shall  pay  all  taxes,  charges  and  assessments  imposed 
under  any  existing  or  future  law  on  the  demised  premises  or  on  any  part 
thereof,  or  on  the  business  there  carried  on,  or  on  receipts,  gross  or  net 
derived,  therefrom,  or  upon  the  capital  stock  of  the  lessor,  or  of  the 
dividends  thereon,  or  upon  the  franchises  of  the  said  company  for  the 
payment  or  collection  of  any  of  which  said  taxes  the  lessor  may  other- 
wise become  liable,  the  lessee  will  not  be  required  to  pay  the  federal 
income  tax  on  the  rental  received  by  the  lessor. 

Legacies:  Legacies  in  all  cases,  unless  clearly  inconsistent  with  the 
intention  of  the  testator,  is  held  to  be  vested  rather  than  contingent. 
Where  there  is  a  vested  interest,  whether  distributed  or  not,  it  is  subject 
to  tax;  and  when  in  the  hands  of  fiduciaries,  they  are  required  to  ac- 
count for,  and  pay  a  tax  thereon.  (T.  D.  2090.) 

Application  of  Income  and  Excess  Profit  Taxes  to  Liberty  Bonds 
Issued  or  To  Be  Issued  Under  the  Act  of  September  24,  1917:  Under 
the  income  tax  law,  as  amended  by  the  war  revenue  act,  interest  paid 
within  the  year  on  indebtedness  incurred  for  the  purchase  of  liberty 
fours  (4's)  may  be  deducted  in  computing  net  income  subject  to  income 
surtaxes  and  excess  profit  taxes.  In  case  of  corporations  this  is,  of 
course,  subject  to  the  limitations  imposed  by  the  income  tax  law  on 
the  amount  of  indebtedness,  interest  on  which  may  be  deducted. 

Investments  in  obligations  of  the  United  States,  including  liberty 
bonds  of  both  issues  made  by  a  corporation  or  partnership  from  capital, 
surplus  or  undivided  profits  will  be  included  in  invested  capital  for  the 
purpose  of  computing  the  deduction  and  rate  of  taxation  under  the 
excess  profit  tax  law;  but  undivided  profits  earned  during  the  taxable 
year  cannot  be  included  in  invested  capital.  (T.  D.  2541,  October  23, 
1917.) 

License  Required  Before  Undertaking  Collection  of  Foreign  Items: 
All  persons,  firms  or  corporations  undertaking  the  collection  of  cou- 
pons, checks,  bills  of  exchange,  etc.,  in  payment  of  interest  upon  bonds 
issued  in  foreign  countries  or  upon  similar  obligations,  or  upon  ob- 
ligations of  foreign  corporations  engaged  in  business  in  foreign  coun- 
tries are  required  by  law  to  obtain  a  license  from  Commissioner  of  In- 
ternal Revenue.  (Art.  54,  Reg.  33.) 

Provision  for  collection  of  tax  on  foreign  obligations  includes 
interest  upon  all  foreign  bonds,  even  though  coupons  may  be  payable 
in  the  United  States.  (Art.  61,  Reg.  33.) 

License  Application  For  Collection  of  Foreign  Items:  Application 
for  such  license  form  (1017)  will  be  made  to  the  collector  for  the  district 
in  which  such  business  is  to  be  carried  on.  Upon  acceptance  of  applica- 


TREASURY  DECISIONS  157 

tion,  collector  will  issue  to  applicant  withoutxcost  a  license  (Form  1010) 
which  will  continue  in  force  until  revoked  or  canceled. 

Blank  forms  of  such  license  bearing  facsimile  signature  of  Com- 
missioner of  Internal  Revenue,  will  be  furnished  collectors  on  requisition, 
who  will,  in  all  cases  countersign  same  before  issuing  to  applicants. 
(Art.  55  Reg.  33.) 

Application  for  these  licenses  and  stubs  of  licenses  issued  shall  be 
retained  and  preserved  in  offices  of  collectors  of  Internal  Revenue. 
(T.  D.  1909.) 

Licensees  to  Keep  Record  of  All  Transactions:  All  persons  licensed 
shall  keep  the  records  in  such  manner  as  to  show  from  whom  every  item 
has  been  received,  and  such  records  shall  be  open  to  inspection  at  all 
times,  to  internal  revenue  officers.  (Art.  62  Reg.  33.) 

License  For  Branch  Office  to  Be  Issued  By  Collector  of  District 
Where  Branch  is  Located:  The  names  and  addresses  of  branch  offices 
shall  be  furnished  to  collector,  in  application  of  said  principal,  and  if 
requirements  have  been  complied  with  to  satisfaction  of  collector,  he 
shall  certify  this  fact  to  Collector  of  Internal  Revenue  for  district  in 
which  branch  office  is  located,  and  collector  to  whom  this  certification 
is  made  shall  issue  to  such  branch  office  a  license  as  in  case  provided  in 
Art.  55.  (Art.  57,  Reg.  33.) 

Licensee  For  Collection  of  Foreign  Items  in  Deducting  Tax:   The 

licensed  person,  firm  or  corporation  first  receiving  such  foreign  items 
for  collections  shall  withhold  therefrom  normal  tax,  and  will  be  held 
'responsible  therefor  unless  exemption  is  claimed.  (T.  D.  2090.) 

If  foreign  item  is  in  form  of  check  or  bill  of  exchange,  the  words 

"income  tax  withheld  by "  (Giving  name,  address,  and  date) 

shall  be  endorsed  or  stamped  thereon  by  such  licensee;  (Or  words 

"Income  tax  exemption  claimed  through " — giving  name  and 

address  of  licensee),  as  the  case  may  be.  (T.  D.  2090),  but  if  item  is 
represented  by  coupon  from  bonds,  the  licensee  shall  attach  thereto  a 
statement  identifying  same  and  the  endorsement  a  stamp  showing  tax 
withheld  shall  be  placed  on  statement  instead  of  coupon  or  coupons. 

Said  endorsement  or  stamp  shall  be  sufficient  evidence  of  with- 
holding of  tax  to  relieve  subsequent  holder  or  purchaser  from  withhold- 
ing. (Art.  58  Reg.  33 — as  amended  by  T.  D.  2023.) 

Licensee,  Procedure  by  When  True  Owner  Is  Unknown  to  Nominal 
Stockholder:  Ownership  certificates  to  cover  shares  belonging  to 
known  shareholders  should  be  obtained.  In  lieu  of  certificates  to  cover 
shares  where  shareholders  are  unknown,  certificate  Form  1002  should 
be  executed  to  cover  each  individual's  share,  and  deduct  the  normal  tax 
therefrom.  If  at  later  date,  a  certificate  covering  any  such  item  claiming 
exemption  is  received,  it  should  be  forwarded  with  your  next  return  to 
collector. 

Collector,  upon  receipt  of  such  certificate,  providing  it  is  received, 
not  later  than  thirty  (30)  days  prior  to  May  1st,  of  next  succeeding 
year,  will  make  proper  notation  on  such  monthly  and  annual  lists  as  ren- 
dered by  collecting  agent,  and  acknowledge  receipt  of  certificate,  and 
after  receipt  of  such  acknowledgment,  amount  of  tax  withheld  upon 
item  covered  by  certificate  may  be  released  and  paid  to  individual  en- 
titled to  same.  (Deputy  Commissioner  L.  F.  Speer,  April  4th,  1914.) 

Return  Monthly  by  Licensee:  Licensee  for  collection  of  foreign 
items,  and  disposition  of  certificates,  shall  obtain  names  and  addresses 
from  whom  items  are  received  and  shall  prepare  same  in  duplicate  on 
Form  1043,  and  file  with  collector  for  his  district  not  later  than  twenty 
days  of  month  next  proceeding  in  which  items  were  paid.  List  shall  be 
dated  and  contain  names  and  addresses  of  taxable  persons,  character 
and  amount  of  income,  amount  of  exemption  claimed,  amount  on  which 
withholding  agent  is  liable  for  tax,  and  amount  withheld.  (Art.  59  Reg. 
33.) 


158  TREASURY  DECISIONS 

Monthly  List  Returns  Need  Not  Be  Sworn  to:  The  requirement 
that  monthly  list  returns  be  made  under  oath  and  filed  by  withholding 
agent  on  or  before  the  20th  day  of  the  month  following  that  in  which 
withholding  occurs  is  waived. 

In  all  cases  list  return  required  of  withholding  agents  (of  which 
monthly  returns  would  form  a  part  as  required  by  regulation)  will  be 
made,  sworn  to  and  filed  as  now  required  by  existing  regulations,  and 
jurat  tor  annual  list  return  will  cover  entire  return  as  thus  made  up. 
(T.  D.  1997.) 

Annual  List  Return  must  be  filed  on  or  before  the  first  day  of 
March  of  each  calendar  year  for  which  annual  return  is  made.  (Art.  53, 
Reg.  33.) 

Annual  List  Return  by  Licensee  for  Foreign  Collections:  In  addi- 
tion to  monthly  lists,  licensee  will  before  the  first  day  of  March  in  each 
year  file  with  collector  a  duplicate  of  return  (on  Form  1043-A)  show- 
ing amount  of  income  paid  and  tax  withheld  by  him  during  preceding 
year.  (Art.  59  Reg.  33.) 

In  all  cases,  annual  return  will  be  sworn  to  and  filed  by  withhold- 
ing agent.  (T.  D.  1997.) 

Expenses  of  Lobbying:  Sums  of  money  expended  for  lobbying 
purposes  and  contributions  made  for  campaign  expenses  held  not  to 
be  ordinary  necessary  expense  in  operation  of  the  business  of  a  cor- 
poration and  not  deductible  in  computing  net  income.  (T.  D.  2137.) 

Taxes  Assessed  Against  Local  Benefits:  Taxes  paid  pursuant  to 
assessment  levied  by  special  districts,  such  as  irrigation,  reclamation, 
drainage,  etc.;  for  sidewalks  in  cities,  street  extension,  grading,  paving, 
etc.,  held  to  be  "taxes  assessed  against  local  benefits."  Such  taxes  are 
not  allowable  deductions.  (T.  D.  2090.) 

Losses  Sustained  by  Partnerships:  The  losses  sustained  in  trade 
by  partnership,  if  determined  for  the  purpose  of  claiming  net  distributive 
losses  as  allowable  deductions  in  individual  returns  of  partnership  mem- 
bers, respectively.  Losses  of  partnership  should  be  ascertained  by 
method  prescribed  for  ascertaining  net  distributive  profits  set  forth  in 
T.  D.  2090. 

Property  Acquired  Prior  to  March  1st,  1913:  The  fair  market  price 
or  value  as  of  March  1st,  is  held  to  be  the  fair  market  price  or  value  as 
of  the  entire  day  of  March  1st  which  in  the  case  of  variation  between 
"opening  and  closing  prices"  for  the  day  would  mean  the  average  price 
for  the  day.  In  case  of  exchange  in  would  be  conditioned  upon  showing 
that  the  exchange  quotation  represented  the  fair  market  price  or  value 
of  the  stock. 

Mining  Individuals  and  Corporations  May  Compute  Depletion  Deduc- 
tions From  Gross  Income  on  the  Basis  of  the  Fair  Market  Value  of  the 
Mine  Contents  as  of  March  1st,  1913,  if  Property  Was  Acquired  Prior 
to  That  Date  or  on  Basis  of  Cost  if  Acquired  Subsequent  to  That  Day: 
Ownership  of  the  mine  contents  at  the  time  for  which  the  computation  is 
made,  is  an  essential  prerequisite  to  an  allowable  deduction. 

Minors,  and  Persons  Unable  to  Make  Returns:  A  fiduciary  acting 
for  a  minor  or  insane  person,  having  a  net  income  in  excess  of  three 
thousand  ($3,000.00)  dollars,  should  make  return  for  his  ward  on  Form 
1045.  In  the  event  he  has  more  than  one  ward,  he  will  be  required  to 
make  return  on  Form  1041,  revised,  and  a  separate  return  on  Form 
1040  for  each  ward  having  net  income  of  three  thousand  dollars 
($3,000.00)  or  more  for  the  year.  (T.  D.  2090.) 

In  case  of  fiduciary  acting  for  minors  or  other  incompetents,  held 
to  be  agents  of  such  persons,  and  must  pay  all  income  tax  on  such 
income  in  their  hands  as  if  acting  for  themselves.  (T.  D.  2231.) 

Married  Woman  Should  Use  Christian  Name:  A  married  woman 
in  executing  such  certificate,  should  sign  her  own  Christian  name  and 
not  that  of  her  husband. 


TREASURY  DECISIONS  159 

Equipment  Trust  Notes:  Are  subject  to  withholding.  Temporary 
receipts  stand  in  place  of  notes  and  where  interest  period  intervenes  and 
retired  within  interest  period  and  prior  to  expiration  of  full  term  of 
bonds,  ownership  certificates  are  required,  and  should  cover  that  part 
of  interest  period  between  beginning  of  such  period  and  date  of  retire- 
ment. (T.  D.  2090.) 

Return  Not  Filed,  Notice  Is  Sent  to  Delinquent  by  Collector: 
Where  returns  are  not  filed  within  prescribed  time  either  by  individuals 
or  corporations,  notice  of  Form  1045  is  in  each  case  sent  to  the  de- 
linqnents.  (Art.  196,  Reg.  83.) 

Notice  of  Failure  to  Make  Return:  Where  required,  returns  are  not 
filed  within  prescribed  time  by  withholding  agent,  notice  on  Form  1045 
should  be  sent  to  delinquent.  (Art.  196,  Reg.  33.) 

Tax  Withheld  as  Source  Not  to  Be  Forwarded  to  Collectors  Until 
Notice  of  Assessment  Has  Been  Received:  Attention  is  directed  to 
Note  (a)  appearing  on  bottom  of  Form  1012,  1021-C,  1043,  and  original 
1044,  providing  that  "withholding  agents  may,  if  they  so  desire,  pay 
at  time  this  list  is  filed  to  Collector  of  Internal  Revenue  with  whom 
same  is  filed  the  amount  of  tax  withheld  during  month  of  which  the 
list  is  made." 

In  order  that  persons  whose  tax  is  deducted  and  withheld  at  source 
may  have  opportunity  to  file  its  source  which  is  required  to  withhold 
and  pay  tax  for  them,  certificates  claiming  benefit  of  deductions  and 
exemptions,  withholding  agent  will  not  pay  to  Collector  of  Internal 
Revenue  tax  withheld  until  after  time  for  filing  claim  for  deductions 
and  exemptions  has  expired.  (T.  D.  1965.) 

In  monthly  returns  as  now  prescribed,  a  space  is  provided  to  show 
amount  of  taxes  which  withholding  agent  may  remit  to  collector  when 
returns  are  filed.  Withholding  agent  will  not,  however,  forward  to 
collector  amount  withheld  by  him  until  notices  of  assessment  are  re- 
ceived from  collector.  (Art.  33,  Reg.  33.) 

Ownership  Certificates,  When  Not  Attached:  When  coupons  are 
not  accompanied  by  certificates  of  ownership,  parties  receiving  said 
securities  for  collection  or  otherwise,  shall  deduct  and  withhold  tax,  and 
shall  attach  to  such  coupons  its  own  certificate  (revised)  Form  1002, 
giving  the  name  and  address  of  the  owner  or  the  person  presenting  such 
coupons  with  a  description  of  the  coupon;  also  setting  forth  that  they 
are  witholding  the  tax  upon  them.  (Article  52,  Regulation  23.) 

Partnerships,  Profits  of  Limited:  The  profits  of  limited  partner- 
ships making  returns  in  the  same  manner  as  corporations  will  be  treated 
the  same  as  dividends  of  corporations;  i.  e.,  the  dividends  received 
from  such  limited  partnerships  will  not  be  subject  to  the  normal 
tax  in  the  hands  of  the  members  of  the  limited  partnership  receiving 
the  same.  (T.  D.  2137.) 

Partnerships,  Members  Liable  in  Their  Individual  Capacity:  Ordi- 
nary co-partnerships  are  not  subject  to  tax  imposed  by  this  act,  but 
individual  members  of  any  such  partnership  are  liable  for  the  income 
tax  in  their  individual  capacity  on  their  respective  shares  of  the  earn- 
ings of  said  partnership,  whether  distributed  or  not.  (Art.  94,  Reg.  33.) 

Employee  of  a  Partnership  Under  Participation  of  Profit  Agreement: 
Constitute  an  item  of  business  expense  to  the  partnership  and  may  be 
deducted  in  computing  income  of  partnership. 

Partnership  Profits  Earned  Prior  to  March  1st,  1913,  for  Fiscal 
Year  Ending  Subsequent  Thereto:  (Decision)  Hyman  Cohen  v.  John 
Z.  Lowe,  Jr.,  Collector,  234  Federal  474.  Plaintiff  in  this  case  charged 
that  taxes  were  assessed  upon  basis  of  profits  received  by  him  as  a 
member  of  the  firm  of  Cohen,  Goldman  &  Co.  for  year  ending  Novem- 
ber 15th,  1913,  which  was  the  fiscal  year  of  the  firm,  a  part  of  that 
year  antedating  taking  effect  of  the  law.  Whether  profits  earned  by 
firm  prior  to  March  1st,  1913,  though  not  credited  or  paid  to  individual 


160  TREASURY  DECISIONS 

partners  till  the  end  of  fiscal  year  in  November,  1913,  are  taxable  to 
the  individual  members  need  not  be  decided  in  this  case.  Plaintiff 
suing  to  recover  a  tax  claimed  to  be  excessive  has  burden  of  proof 
in  showing  its  illegality  and  must  show  profits  were  earned  by  partner- 
ships prior  to  March  1st,  1913,  and  in  what  sum. 

Plaintiff  contends  equitable  method  would  be  to  proportion  profits 
for  fiscal  year  of  firm  in  equal  monthly  instalments,  and  allot  to  the 
period  preceding  March  1st,  1913,  its  proper  proportion,  and  that  this 
•method  of  apportioning  has  been  adopted  by  the  Treasury  Department 
in  like  cases.  There  is  no  such  specific  regulation  by  the  Treasury 
Department  governing  this  matter.  In  absence  of  regulation,  however 
equitable,  the  method  in  analogous  cases  can  only  be  adopted  by  this 
court  in  this  case  by  stipulation  of  parties.  It  may  be  that  no  profits 
accrued  to  the  partnership  after  March  1st,  1913,  and  none  were  taxed 
accordingly  except  such  as  were  properly  subject  to  tax.  In  absence  of  a 
showing  to  the  contrary,  the  court  must  assume  the  tax  was  legally 
collected,  the  burden  being  upon  the  plaintiff  to  establish  illegality. 

Profits  of  Partnership  Taxable  to  Members  Thereof:  Partner's 
pro  rata  share  of  profits  derived  from  partnership,  whether  divided  or 
not,  shall  be  included  in  the  personal  return  of  each  partner.  (Art.  11, 
Reg.  33.) 

Individual  members  of  a  partnership  should  include  in  their  indi- 
vidual returns  their  respective  interest  in  partnership  profits  ascertained 
for  the  business  year  ending  on  any  date  in  1917.  (T.  D.  2137.) 

Partners  Should  Return  Their  Respective  Interests  in  Firm's  Ac- 
counts Receivable:  The  distributive  interests  of  partners  in  firm's  net 
income  as  shown  by  books  when  closed  should  be  reported  in  their 
return  and  not  their  distributive  interests  in  so  much  of  the  net  income 
as  represent  actual  cash  receipts. 

Profits,  Undivided  Annual,  of  Partnerships  returned  by  individual 
members  and  taxes  paid  thereon  need  not  be  again  included  in  their 
annual  return  when  profits  are  actually  distributed.  (Art.  14,  Reg.  33.) 

Returns  May  Be  Required  of  Partnerships:  Partnerships  are  not 
subject  to  income  tax  and  are  only  required  to  make  return  when  so 
requested  by  the  Commissioner  of  Internal  Revenue  or  by  the  Col- 
lector of  the  District  in  which  such  partnership  is  located;  (Art.  12, 
Reg.  33.) 

No  return  for  partnership  as  such  is  required  to  be  made  for  the 
year  (1917)  unless  it  shall  hereafter  specifically  be  requested.  (T.  D. 
2137.) 

Partnerships  Must  File  Certificates  Establishing  Their  Identity: 
Certificate  Form  No.  1063  is  provided  for  firms,  organizations  and  fidu- 
ciaries for  the  purpose  of  establishing  their  identity  and  non-liability 
to  withholding  of  tax  on  income  at  source  (other  than  interest  on 
bonds.)  (T.  D.  1998.) 

Partnerships,  Foreign,  Owning  Stock  of  Domestic  Corporations, 
but  Not  Record  Owners  Thereof:  Such  dividends  on  stock  of  domestic 
corporations  or  resident  alien  corporations  are  held  to  be  prima  facie 
income  to  the  record  owner  of  the  stock,  and  such  owner  will  be  liable 
for  income  tax  according  to  his  or  her  status  unless  a  disclosure  of 
actual  ownership  is  made  to  the  Commissioner  of  Internal  Revenue, 
which  shall  show  who  the  owner  is  and  his  address,  and,  that  record 
owner  is  not  actual  owner.  (T.  D.  2401.) 

Profits  Accruing  to  Non-Resident  Alien  Partnerships  on  Sale  of 
Stock  Negotiated  Through  Domestic  Bankers:  Where  a  foreign  bank- 
ing house  buys  through  a  domestic  banking  house  shares  of  stock  and 
sells  the  stock  at  a  profit,  this  profit  is  taxable.  But  the  domestic  firm 
need  not  retain  the  normal  tax. 


TREASURY  DECISIONS  161 

Partnerships:  Ordinary  co-partnerships  not  subject  to  tax  imposed 
by  this  act,  but  individual  members  of  any  partnership,  are  liable  for 
income  tax  in  their  individual  capacity  on  their  respective  shares  of 
earnings  of  such  partnership,  whether  distributed  or  not.  (Art.  94, 
Reg.  33.) 

Withholding  From  Partnership  Salaries  and  Drawing  Accounts: 
It  is  HELD  that  withholding  is  required  under  the  terms  of  the  iaw 
whenever  the  contract  or  articles  of  agreement  between  partnership 
members  provides  for  stipulated  salaries,  as  such,  in  payment  of  services 
rendered  by  the  individual  members.  However,  in  cases  where  by 
agreement  or  otherwise,  members  of  the  firm  are  permitted  to  draw 
either  stated  or  unstated  sums  in  advance  of  an  annual  or  other 
periodic  determined  partnership  profits,  no  withholding  is  required,  as 
these  sums  do  not  represent  the  "fixed  or  determinable  annual  gains, 
profits  and  income  of  another  person  as  covered  by  Sec.  9  (b)  of  the 
Federal  Income  Tax  of  September  8,  1916." 

Money  due  for  professional  services  of  lawyers,  physicians,  and  the 
like,  should  be  entered  on  the  annual  return  for  the  year  in  which  such 
payments  were  received. 

Where  service  and  payment  period  is  divided  by  the  end  of  the 
taxable  year,  compensation  for  the  period  so  divided  should  be  ac- 
counted for  in  the  returns  for  the  year  in  which  such  payment  is  re- 
ceived. Where  the  service  is  of  such  nature  as  to  be  compensated  by 
fee  that  no  portion  becomes  due  until  service  is  completed,  then  the 
total  amount  of  the  compensation  should  be  included  in  the  return  for 
the  year  in  which  the  compensation  is  received.  (T.  D.  2090.) 

Certified  Checks  may  be  accepted  in  payment  of  all  internal  revenue 
taxes  if  drawn  on  National  State  Banks  and  Trust  Companies,  which 
will  not  require  the  payment  by  the  Government  for  their  exchange. 

The  law  does  not  specifically  authorize  the  acceptance  of  any  form 
of  exchange  in  payment  of  internal  revenue  taxes  other  than  currency 
and  such  certified  checks  as  are  specifically  described  in  Department 
Circular  No.  11.  If  collector  elects  to  accept  other  mediums  of  exchange 
not  specifically  authorized  by  law,  he  does  so  at  his  own  risk  if  depos- 
itary bank  will  accept  such  forms  of  exchange  endorsed  by  collector 
and  issue  regular  certificates  of  deposit  therefor.  The  responsibility 
would  appear  to  shift  from  collector  to  depositary.  (T.  D.  1990.) 

Payments:  Certified  Checks  and  Other  Forms:  This  office  cannot 
authorize  any  departure  from  the  requirements  of  the  law,  which  are 
that  internal  revenue  taxes  are  payable  in  cash,  certified  checks  drawn 
in  favor  of  collectors  on  National  or  State  Banks  or  Trust  Companies 
located  in  cities  where  respective  collectors  deposit  their  collections,  or 
such  "out-of-town"  certified  checks  as  can  be  cashed  without  expense  to 
the  Government. 

It  has  always  been  the  attitude  of  this  office  that  if  collectors  elect 
to  accept  personal  checks,  or  any  other  form  of  exchange  not  specifically 
auhorized  by  law,  they  do  so  at  their  own  risk,  and  are  responsible  under 
their  bond  for  any  loss  that  may  occur  thereby  (T.  D.  2158.) 

Tax:  When  It  Must  Be  Paid  by  Corporation  When  Return  Has  Been 
Made  by  Commissioner  of  Internal  Revenue:  The  assessment  made  on 
basis  of  such  return  shall  be  paid  immediately  on  notice  and  demand 
given  by  collector.  (Art.  177,  Reg.  33.) 

And  the  tax  so  discovered  to  be  due,  together  with  additional  tax 
prescribed,  shall  be  assessed,  and  amount  thereof  shall  be  paid  immedi- 
ately upon  notice  and  demand.  (Art.  184,  Reg.  33.) 

Under  a  similar  provision  of  Corporation  Tax  Law  the  Commissioner 
of  Internal  Revenue  is  held  to  have  authority  to  amend  the  return  of  a 
corporation  as  a  "false"  return  if  it  is  incorrect,  although  made  in  good 
faith  even  after  tax  assessed  on  original  return  has  been  paid.  (Elliott 
Nat.  Bank  vs.  Gill,  210  Fed.  933.) 


162  TREASURY  DECISIONS 

Penalty  for  Delay  in  Payment  of  Taxes:  To  any  sum  or  sums  due 
and  unpaid  after  the  date  for  payment  stated  in  the  notice  and  demand 
issued  by  the  collector,  there  shall  be  added  the  sum  of  5  per  cent  on 
the  amount  so  unpaid  and  interest  at  the  rate  of  1  per  cent  per  month. 
(Art.  164,  Reg.  33.) 

Receipt  for  Taxes  Paid:  The  only  official  receipt  for  taxes  that 
collectors  may  sign  under  the  law  are  stamps,  where  stamps  are  issued, 
or  Form  1,  when  the  tax  is  not  payable  by  stamp,  which  receipts  are 
to  be  issued  to  every  taxpayer  for  taxes  paid.  However,  the  depart- 
ment has  no  objection  to  collectors  signing  commercial  receipts  or 
voucher  checks,  and  (subject  in  the  latter  case  to  rules  of  depositary), 
but  they  should  in  signing  such  receipts  or  vouchers,  write  or  stamp 
across  the  face  thereof  the  words  "not  an  official  receipt."  The  official 
receipt  on  Form  1  must,  however,  be  furnished;  and  it  is  to  be  dis- 
tinctly understood  that  an  unofficial  receipt  is  not  in  any  way  binding 
on  the  department,  and  will  not  be  received  by  it  as  evidence  of  pay- 
ment of  the  tax.  (T.  D.  2226.) 

Computation  of  Income  Tax  on  Payments  Received  on  Contract  to 
Sell  Real  Estate  on  the  Installment  Plan  in  Cases  Where  Title  Is  Not 
Transferred  Until  Final  Payment  Is  Made:  The  case  as  presented, 
"where  A  buys  10  acres  of  land  for  $1,200  per  acre,  and  subdivides  it  into 
60  lots.  He  spends  $3,000.00  in  improvements,  sewer,  walks,  etc.,  on  the 
subdivision,  making  the  cost  of  each  lot  to  him  $250.00.  These  lots  are 
then  sold  on  a  land  contract,  which  while  it  vests  possession  of  lots  in 
the  vendee,  explicitly  retains  title  to  the  same  vendor  and  provides  for  a 
reversion  to  him  in  case  of  default  on  terms  of  the  contract.  Usually 
these  lots  are  sold  on  contracts,  the  terms  of  which  are  ten  per  cent 
down,  and,  for  lots  under  five  hundred  dollars,  monthly  payments  of  five 
dollars  each  until  full  amount  is  paid.  Supposing  that  in  the  aforemen- 
tioned example,  A  sold  thirty  lots  in  1916  for  $450.00  each,  and  received 
ten  per  cent  down,  and,  say,  four  monthly  payments  on  each  account, 
what  income  subject  to  taxation  would  be  returnable  therefrom?"  This 
office  holds  that  such  a  contract  is  for  the  ultimate  sale  and  purchase  of 
lot  in  question,  that  every  dollar  received  under  the  contract  represents, 
in  part,  a  return  of  a  portion  of  the  cost  of  the  lot  to  the  vendor,  and  in 
part  a  portion  of  the  total  profit  to  be  derived  from  its  sale,  and  that  the 
amount  of  profit  represented  by  all  payments  received  during  the  tax 
year  should  be  taken  into  consideration  when  computing  for  Federal 
Income  Tax  purposes,  the  amount  of  gain  or  profit  to  be  included  in  the 
vendor's  personal  income  tax  return.  The  vendor,  of  course,  may  claim 
as  allowable  deductions  such  amounts  as  are  actually  expended  during  the 
tax  year  for  advertising,  hire  of  salesmen,  office  expenses,  taxes,  etc. 
Under  the  terms  of  the  contract,  in  case  a  default  occurs  in  payment,  the 
vendor  retains  all  payments  received  as  liquidating  damages,  and  the 
vendee  loses  all  right  and  title  he  may  have  to  the  property,  or  to  the 
amount  of  payments  made,  the  entire  amount  therefor  paid  and  credited 
to  principal  should  be  included  as  income  in  year  during  which  default 
occurs.  (Commissioner  L.  F.  Speer,  March  14th,  1917.) 

Penalty  for  Failure  to  Make  Return  or  Falsifying  Same;  If  person 
liable  to  make  return  for  himself  or  others  fails  to  make  same,  but 
consents  to  disclose  his  particular  business  or  such  facts  as  are  neces- 
sary in  the  filing  of  a  return,  it  shall  be  the  duty  of  the  collector  to 
make  such  lists  or  return,  which  being  distinctly  read  and  consented  to, 
signed  and  verified  by  oath  by  person  liable  to  make  such  returns,  and 
the  same  then  may  be  received  as  return  of  such  person. 

In  any  case  where  a  person  is  liable  to  make  return  shall  neglect  or 
refuse  to  make  same  or  make  wilfully  false  or  fraudulent  return,  it 
shall  be  the  duty  of  the  collector  after  due  notice  has  been  given  to  make 
such  lists  according  to  the  best  information  that  he  can  obtain  by 
examination  of  such  person  or  other  evidence.  When  duly  certified  by 


TREASURY  DECISIONS  163 

the  collector  such  list  shall  be  return  of  said  person,  and  the  tax  ascer- 
tained to  be  due  upon  such  return  together  with  penalty  incurred 
shall  be  assessed  and  collected.  (Art.  21,  Reg.  33.)  (T.  D.  1950.) 

Penalty,  Individuals:  In  the  case  of  neglect  or  refusal  to  make  a 
return  within  the  prescribed' time  (except  in  case  of  sickness  or  ab- 
sence) there  shall  be  added  50  per  cent  to  the  tax.  (T.  D.  1950.) 

In  the  case  of  (intentional)  neglect  or  refusal  to  make,  or  for  a 
false  or  fraudulent  return  made,  there  should  be  100  per  cent  added  to 
the  tax.  (T.  D.  1950.) 

Penalty,  For  Failure  to  Make  Return  by  Withholding  Agents  at 
Proper  Time:  Failure  to  make  and  file  returns  on  Form  1013,  1041, 
1042,  1043a  and  1044a,  before  March  1st  of  each  year  renders  a  with- 
holding agent  liable  to  specific  penalty  of  $20.00  to  $1,000.00.  (Letter 
1265  to  collectors.) 

The  50  per  cent  addition  to  tax  for  failure  to  make  return,  and  100 
per  cent  additional  for  intentional  false  or  fraudulent  return  will  not 
be  assessed  against  delinquent  withholding  agents.  (Letter  1265  to 
collectors.) 

Penalty,  Avoiding  the  50  Per  Cent  and  Specific,  for  Failure  to 
File  Return  on  Time  by  Subsequently  Filing  Within  Notice  From 
Collector  Applying  to  the  Act  of  September  8,  1916,  Only:  The  section 
of  the  Act  of  September  8,  1916,  which  provides:  "In  case  of  any  failure 
to  file  and  make  a  return  or  list  within  the  time  prescribed  by  law,  or 
by  the  collector,  the  Commissioner  of  Internal  Revenue  will  add  to  the 
tax  50  per  cent  of  its  amount,  except  that  when  a  return  is  voluntarily 
and  without  notice  from  the  collector  filed  after  such  time,  and  it  is 
shown  that  the  failure  to  file  it  is  due  to  reasonable  cause  and  not  a 
wilful  neglect,  no  such  addition  shall  be  made  to  the  tax."  It  is  HELD 
that  this  provision  applies  only  to  the  returns  required  to  be  filed  for  the 
year  1916  and  subsequent  years.  (Letter  54  to  collector.) 

Claim  for  Abatement  Stays  5  Per  Cent  Penalty  Until  Claim  Is 
Rejected:  "When  an  assessment  is  made  for  a  tax  or  penalty  and 
demand  made  for  payment,  if  a  claim  for  abatement  (Form  47)  is  filed 
within  ten  days  after  such  demand,  and  accepted  by  the  collector,  the 
time  ceases  to  run  against  the  claimant  as  to  5  per  cent  penalty  until  the 
claim  is  rejected.  Upon  receipt  of  notice  of  rejection  of  the  claim,  the 
collector  should  immediately  notify  the  party  assessed  and  demand  the 
payment  of  the  tax;  if  the  tax  is  not  then  paid  within  ten  days  after 
mailing  of  the  notice  to  the  claimant  by  the  collector,  of  the  rejection  of 
the  claim,  the  5  per  cent  penalty  accrues.  Interest  at  1  per  cent  per 
month  continues  to  run  and  should  be  collected  with  the  tax  at  the 
time  of  payment  for  the  full  number  of  calendar  months  which  inter- 
vened between  the  expiration  of  the  first  ten  days'  notice  and  the  date 
of  the  payment  of  the  tax,  notwithstanding  the  fact  that  a  claim  for 
abatement  has  been  filed."  (Reg.  14,  October  15,  1911.) 

PENALTIES,    Collection    Suit    to    Enjoin:      Kohlhamer    vs. 
Smietanka,  Collector,  239  Fed.  408,  January  31,  1917. 

While  Section  3224,  Revised  Statutes,  which  prohibits  suits  to 
enjoin  the  collection  of  internal  revenue  taxes  does  not  specifically  in- 
clude "penalties"  as  such,  yet  where  penalties  are  authorized  by  statutes 
to  be  added  to  the  tax  and  collected  as  part  of  the  tax,  the  court  will 
hold  that  the  penalty  is  a  part  of  the  tax,  the  assessment  and  collection 
which  are  governed  by  Section  3224. 

Foreign  Pensions:  License  not  required  for  collection  of  foreign 
pensions  paid  to  resident  aliens  or  citizens  of  the  United  States.  (T.  D. 
2090.) 

Pensions:  Pensions  paid  by  the  United  States  Government  are  sub- 
ject to  income  tax.  (T.  D.  2090.) 

Permanent  Improvements  Made  Under  Contract  in  Addition  to 
Rentals:  Where  tenant  enters  into  contract  where  he  agrees  to  pay  a 


164  TREASURY  DECISIONS 

yearly  rental  and  in  addition  agrees  to  make  improvements  in  a  certain 
sum:  such  amount  as  equals  the  improvements  and  actually  accrues  to 
the  benefit  of  the  landlord  is  held  to  be  income  to  the  landlord  at  time 
of  its  expenditure  and  should  be  withheld  by  tenant  for  the  taxable  year 
in  which  benefits  of  such  expenditures  acarue  to  landlord.  (T.  D.  2135.) 

Fiduciary  Cannot  Be  Created  by  Power  of  Attorney:  A  person 
cannot,  by  power  of  attorney,  delegate  a  duty  to  another  which  he 
cannot  himself  perform,  and  inasmuch  as  an  individual  cannot  relieve 
withholding  agent  from  requirements  of  Income  Tax  Law  by  filing 
Form  1015  (or  Form  1063),  the  person  holding  power  of  attorney  is 
without  authority  to  file  this  certificate  as  a  fiduciary.  However,  for 
income  tax  purposes  he  may  file  any  certificate  which  his  principal  would 
be  able  to  file.  (T.  D.  2090.) 

Manufactured  Products,  Cost  of:  The  cost  of  raw  material,  the 
cost  of  labor,  men  who  actually  work  on  such  products,  as  well  as  cost 
of  supervisory  labor,  may  be  included  as  an  element  of  the  cost  of 
manufactured  products,  provided  such  expenditures  are  not  separately 
deducted  from  gross  income  in  return  of  annual  net  income. 

The  overhead  charges  referred  to  in  Form  1031  should  include  the 
salaries  of  officers,  clerk  hire,  and  such  other  office  expenses  as  do 
not  have  to  do  directly  with  the  manufacture  of  the  product.  (T.  D. 
2152.) 

Profit  from  Sale  or  Other  Disposition  of  Capital  Assets:  Profit  is 
the  difference  between  the  selling  price  and  the  cost  where  the  selling 
price  is  more  than  the  cost.  (T.  D.  2080.) 

Profits  from  Sale  of  Real  Estate:  Gains  and  profits  resulting  from 
a  real  estate  transaction  are  subject  to  income  tax  in  so  far  as  they 
represent  actual  net  income  for  the  year  in  which  the  transaction 
occured.  (T.  D.  2137.) 

Profits  Realized  by  Individuals  or  Corporations  from  Sale  of  Real 
Estate  will  be  taxable  except  where  property  in  connection  with  which 
property  is  obtained  was  acquired  prior  to  March  1st,  1913. 

For  income  tax  purposes,  where  there  is  an  actual  sale,  profit  will 
be  considered  as  realized,  although  payment  is  to  be  made  in  install- 
ments, and  presumably  bear  interest  and  are  held  to  be  worth  in  cash 
their  face  value.  (T.  D.  2090.) 

Computing  Profits  When  Various  Parcels  of  Stock  of  the  Same 
Issue  Are  Bought  and  Sold  at  Different  Dates.  Whenever  possible  the 
shares  sold  shall  be  identified  by  the  number  of  the  certificates  covering 
them.  When  sold  and  its  identity  cannot  be  determined,  it  should  be 
charged  against  the  stock  first  purchased  and  remaining  unsold.  If  the 
purchase  occurred  on  or  after  March  1st,  1913,  the  entire  amount  of 
difference  should  be  returned. 

Appraised  Value  of  Property  at  Time  of  Death  of  Owner,  if  Subse- 
quent to  March  1st,  1913,  the  Basis  for  Determining  Gain  or  Loss  on 
Subsequent  Disposition:  When  individual  dies  after  March  1st,  1913, 
leaving  property,  all  gains  or  losses  and  subsequent  sales  shall  be  com- 
puted on  basis  of  appraised  value  at  date  of  death  and  executors  should 
not  make  return  of  book  gains  or  losses  either  up  to  the  date  of  death 
or  on  transfer  of  property  to  legatee  or  trustee  under  will,  or  from  one 
trustee  to  succeeding  trustee,  the  appraised  value  at  the  date  of  death  re- 
maining as  basis  for  all  subsequent  realization  of  losses  or  gains  in  cash. 
(From  letter  signed  by  Commissioner  W.  H.  Osborn  and  dated  February 
3rd,  1917.) 

Public  Utilities;  Corporation  Excise  Tax — Act  of  August  5th,  1909: 
Union  Hollywood  Water  Co.  v.  John  P.  Carter,  Collector.  (238  Fed. 
329.)  (April  4th,  1917.) 

The  fact  that  plaintiff  was  a  Public  Utility  Corporation  which,  under 
the  laws  of  a  state,  was  not  the  owner  of  the  property,  but  merely  en- 
trusted with  the  use  thereof,  which  it  must  devote  to  the  public,  does  not 


TREASURY  DECISIONS  165 

entitle  it  to  more  favorable  treatment  than  other  corporations,  it  being  a 
corporation  organized  for  profit,  having  a  capital  stock  represented  by 
shares,  and  the  act  making  no  exceptions  in  favor  of  Public  Utilities. 

Moneys  received  from  consumers  of  water  for  service  connections 
and  pipe  extensions  are  not  permitted  to  be  deducted  from  the  gross 
amount  of  the  income  for  they  do  not  come  within  any  of  the  permitted 
classes  of  deductions  mentioned  in  the  statute.  Moneys  so  expended  are 
invested  in  permanent  improvements  which  tend  to  enhance  the  rental 
and  the  market  value  of  the  water  system. 

Real  Estate;  Losses  from  Sale  of  Other  Disposition:  Special  as- 
sessments, if  any,  actually  paid  as  local  benefits  in  connection  with 
real  estate  are  held  to  be  expenditures  which  add  to  the  value  of  prop- 
erty and  should  be  capitalized,  whether  such  expenditures  are  made 
prior  to  or  subsequent  to  incidence  of  tax;  that  is  to  say,  such  expendi- 
tures, no  matter  when  paid,  became,  in  effect,  a  part  of  the  cost  of  the 
property. 

All  carrying  charges  of  income  which  may  have  been  received  prior 
to  sale  of  property  may  be  included  as  part  of  the  cost  of  such  prop- 
erty, and  cost  thus  determined  will  be  excluded  from  gross  proceeds 
of  sale  of  such  property,  and  excess  of  such  cost  returned  as  income. 

If  carrying  charges  are  less  than  the  income,  such  carrying  charges, 
unless  they  be  for  improvements  or  betterments,  will  not  be  added  and 
made  part  of  the  cost  of  the  property,  but  will  be  from  gross  income 
received,  in  which  case  it  will  appear  that  return  of  corporation  will 
show  net  income  subject  to  tax.  (From  letter  signed  by  Commissioner 
W.  H.  Osborn,  dated  December  22nd,  1914.) 

Receipts,  Personal  by  Collectors:  After  careful  consideration,  this 
office  has  reached  the  conclusion  that  to  protect  the  interest  of  both 
the  taxpayer  and  the  government,  some  evidence  should  be  given  at 
the  time  of  payment  to  taxpayers  who  pay  taxes  directly  to  deputy 
collectors,  and  such  a  receipt  as  follows  is  not  in  violtaion  of  Section 
3188,  which  prohibits  issuance  of  receipts  in  lieu  of  a  stamp: 

"Received  of  JOHN  DOE  $ ,  to  be  forwarded 

to  the  Collector  to  cover  special  tax  due  as " 

In  case  payment  is  for  stamp  tax,  or  for  amount  other  than  special 
tax,  the  form  may  be  modified  accordingly.  (T.  D.  2341.) 

Receivers:  The  receiver  will  be  required  to  file  a  fiduciary  return 
when  interest  payments  are  in  excess  of  three  thousand  ($3,000.00) 
dollars. 

In  such  case  tax  should  be  withheld  subject  to  authorized  exemp- 
tions claimed.  (From  letter  signed  by  Acting  Commissioner  David  A. 
Gates,  dated  February  27th,  1915.) 

As  related  to  a  corporation,  receiver  is  not  withholding  agent,  save 
as  corporation  or  its  fiscal  agent  would  be  under  such  circumstances. 
(From  letter  signed  by  Acting  Commissioner  David  A.  Gates,  dated 
June  22nd,  1916.) 

Receivers,  Trustees  in  Bankruptcy,  to  Make  Returns  and  Pay  Tax 
for  Corporations  Whose  Property  or  Business  They  Are  Managing: 
The  receiver  of  property  of  a  railway  company  is  liable  for  income  tax 
on  net  income  derived  by  him  from  operation  of  property,  even  though 
such  income  is  used  by  receiver  under  orders  of  court,  and  payment  of 
indebtedness  incurred  in  part  prior  to  and  during  the  year  in  which  in- 
come was  earned. 

Receiver  is  liable  for  tax  on  income  arising  and  accruing  during 
his  incumbency,  even  though  income  is  retained  by  him  pending  orders 
of  court  as  to  disposition.  The  fact  that  outstanding  liability  incurred 
in  part  prior  to  and  in  part  during  the  year  in  which  income  was  earned 
are  greater  or  less  than  amount  of  income  is  immaterial.  If  earnings 
of  year  are  in  excess  of  expenses  incurred,  in  creating  income,  so  that 
net  income  arises  or  accrues,  that  income  is  taxable,  and  receiver  is 
liable  for  tax  imposed  thereon. 


166  TREASURY  DECISIONS 

Receiver  is  liable  for  income  tax  assessable  upon  income  accru- 
ing during  his  incumbency  even  though  under  order  of  court  such  in- 
come is  turned  over  to  railroad  company,  outstanding  liabilities  of  such 
company  having  been  satisfied. 

Receiver  is  liable  for  tax  assessable  upon  income  accruing  during 
his  incumbency,  even  though  such  income  under  orders  of  court,  is 
used  in  payment  of  interest  of  bonds  of  such  company,  such  interest 
having  accrued  during  the  year  in  which  income  was  earned,  and  being 
in  excess  of  amount  which  railway  company  under  Income  Tax  Law, 
would  be  permitted  to  deduct  from  gross  income  and  arriving  at  net  in- 
come, were  it  in  charge  of  property.  A  Receiver  must  apply  the  same 
rules  both  as  to  income  and  deduction,  as  corporation  would  apply  same 
in  making  return.  For  the  purpose  of  Income  Tax  receiver  acts  in  ca- 
pacity of  officers  of  corporation.  (Acting  Commissioner  David  A.  Gates, 
June  22nd,  1916.) 

Receiver  to  an  Individual  to  Make  Return  and  Pay  Tax:  Under 
Section  (2b)  act  of  September  8th,  1916,  "the  income  of  any  kind  of 
property  held  in  trust  except  when  the  income  is  returned  for  the  pur- 
pose of  the  tax  by  the  beneficiary"  is  subject  to  normal  and  additional 
tax,  the  tax  to  be  assessed  to  the  trustee.  Under  the  provisions  of 
Section  (7a)  the  receiver  will  be  permitted  to  deduct,  as  an  exemption, 
three  thousand  dollars  ($3,000)  in  his  return.  This  return  is  to  be  made 
on  Income  Tax  Form  1040. 

The  receiver  is  indemnified  by  the  act  against  the  claim  or  demands 
of  every  beneficiary  for  all  payments  of  taxes  which  he  shall  be  required 
to  make  under  the  provisions  of  the  Act  of  September  8th,  1916,  and  he 
shall  have  credit  for  the  amount  of  such  payments  against  the  beneficiary 
or  principal  in  any  account  which  he  makes  as  such  receiver: 

The  income  being  thus  freed  of  tax  liability  imposed  by  the  statute, 
it  may  thereafter  be  dealt  with  by  the  receiver  without  further  regard 
to  the  requirements  of  the  tax  statute.  (Deputy  Commissioner  L.  F. 
Speer,  February  9th,  1917.) 

Liability  of  a  Receiver  in  Partition  Proceedings:  While  a  receiver  is 
an  indifferent  person  between  the  parties,  appointed  by  the  court  to  col- 
lect and  receive  the  issues  and  profits  from  property  under  the  provision 
of  Section  9  (g)  of  income  tax  law,  he  is  the  owner,  for  income  tax  pur- 
poses, and  will,  therefore,  include  the  total  income  received  by  him  under 
this  receivership  in  the  one  return  to  be  made  by  him,  (Page  205  Missing) 

Record  Owner  of  Stock,  Duty  of,  When  Other  Than  Actual  Owner: 
It  is  customary  for  a  large  amount  of  stock  to  be  left  in  the  names  of 
stock  exchange  houses,  as,  for  instance,  in  the  names  of  members 
of  the  New  York  Stock  Exchange.  The  ownership  of  the  stock  will 
be  transferred  very  many  times  before  the  certificate  is  transferred  if 
the  certificate  stands  in  name  of  a  stock  exchange  house.  The  stock 
exchange  house,  record  owner  of  the  stock  has  no  means  of  ascertain- 
ing the  true  owner  and  no  means  of  knowing  whether  or  not  the  true 
owner  is  a  non-resident  alien  corporation.  In  such  a  case  the  tax  lia- 
bility rests  on  the  record  owner  of  the  stock  and  the  record  owner  can 
secure  release  only  by  establishing  actual  ownership  by  means  of  the 
certificates  provided  for  that  purpose.  The  taxable  status  of  actual 
owner  will  establish  the  record  owner's  duty  in  the  premises.  (Deputy 
Commissioner  L.  F.  Speer,  December  28th,  1916.) 

Suit  Against  Collector  to  Recover  Tax  by  a  Corporation  Incor- 
porated to  Provide  and  Operate  a  Railroad  Terminal:  Boston  Terminal 
Co.  v.  Jas.  D.  Gill,  Collector  U.  S.  District  Court  for  the  District  of 
Mass.,  December  26,  1916. 

The  plaintiff  was  incorporated  to  provide  and  operate  a  terminal 
for  a  certain  stated  railroad  which  was  required  to  use  a  station  to 
be  built  and  to  which  the  capital  stock  of  the  corporation  was  issued, 
said  railroad  paying  for  the  use  of  the  terminal,  which  payments  were 
part  of  the  operating  expenses  of  the  railroad,  they  being  entitled  to 


TREASURY  DECISIONS  167 

dividends  on  the  stock  in  the  corporation.  It  was  held  that  the  plaintiff 
company  was  organized  for  profit  within  the  meaning  of  the  law.  The 
plaintiff  corporation  to  which  payment  was  required  to  be  made  by 
the  railroad  using  the  terminal  and  which  granted  concessions  and 
licenses  to  others  than  the  said  stock  holding  railroads  for  the  trans- 
actions of  the  various  kinds  of  business  and  which  operated  facilities 
for  supplying  power,  heat,  light,  gas,  etc.,  manufactured  by  it  was 
engaged  in  business. 

Interest  on  bonded  or  other  indebtedness  paid  within  the  year  is 
to  be  deducted  from  gross  income,  according  to  the  second  clause  of 
Section  38,  but  only  the  interest  paid  upon  such  indebtedness  to  an 
amount  not  exceeding  the  corporation's  paid  up  capital  stock. 

The  taxes  assessed  upon  returns  amended  by  the  Commissioner 
and  collected  from  the  plaintiff  company  were  lawfully  collected  and 
judgment  was  rendered  for  the  defendant. 

Withholding  Agents,  Responsibility  of,  for  Refundment  When  Form 
Is  Filed:  No  penalty  attaches  to  action  of  withholding  agent  in  re- 
funding amounts  improperly  claimed  in  Form  1008,  when  refundment  is 
made  in  good  faith. 

Withholding  agents  should  be  aware  of  fact  that  assessment  will 
be  made  by  this  office  in  the  light  of  facts  shown  by  certificate  on  Form 
1008,  revised,  attached  to  their  return;  and  reasonable  care  should  be 
exercised  in  performing  duties  imposed  by  law. 

When  it  appears  on  face  of  Form  1008,  revised,  and  from  facts  in 
possession  of  withholding  agent  that  claim  is  either  erroneous  or  fraud- 
ulent, refundment  should  be  denied.  In  such  case  claimant  has  proper 
redress  by  means  of  a  claim  for  abatement  provided  by  Article  33  (c), 
Reg.  33,  of  January  5th,  1914. 

Same  care  should  be  exercised  by  collectors  in  authorizing  refund- 
ment as  would  be  expected  of  withholding  agents.  (T.  D.  2135.) 

Claims  for  Refund  and  Abatement  of  Taxes:  The  Commissioner  of 
Internal  Revenue,  subject  to  the  regulations  prescribed  by  the  Secretary 
of  the  Treasury,  is  authorized,  on  appeal  to  him  made,  to  remit,  refund, 
and  pay  back  all  taxes,  erroneously  or  illegally  assessed,  all  penalties 
collected  without  authority,  and  all  taxes  that  appear  to  be  unjustly 
assessed  or  excessive  in  amount,  or  in  any  manner  wrongfully  col- 
lected; also  to  repay  to  any  collector  or  deputy  collector  the  full  amount 
of  such  sums  of  money  as  may  be  recovered  against  him  in  any  court,  for 
any  internal  taxes  collected  by  him,  with  costs  and  expenses  of  suit; 
also  all  damages  and  costs  recovered  against  any  assessor,  assistant 
assessor,  collector,  deputy  collector,  or  inspector,  in  any  suit  brought 
against  him  by  reason  of  anything  done  in  due  performance  of  his 
official  duties;  provided,  where  second  assessment  is  made  in  case  of 
a  list,  statement  or  return  in  the  opinion  of  collector  or  deputy  collector 
is  false  or  fraudulent  or  contains  any  under-statement  or  under-valua- 
tion,  such  assessment  shall  not  be  remitted,  nor  shall  taxes  collected 
under  such  assessment  be  refunded  or  paid  back,  unless  it  is  proved 
that  said  list,  statement,  or  return  was  not  false  or  fraudulent,  and  did 
not  contain  any  under-statement  or  under-valuation.  (Sec.  3220,  Rev.  St.) 

Reimbursement  of  Expenses  Incident  to  an  Accident:  Amounts 
received  from  a  railroad  company  by  way  of  reimbursement  for  ex- 
penses incident  to  an  accident  is  not  subject  to  an  income  tax.  (T.  D. 
2135.) 

Rent:  Where  tenant  rents  two  pieces  of  property  from  same  owner, 
payment  should  be  combined  and  when  aggregate  income  is  in  excess 
of  $3,000,  normal  tax  should  be  withheld,  subject  to  authorized  ex- 
emptions claimed. 

Where  Board  of  Education  for  school  district  lets  property  at 
annual  rental  exceeding  $3,000,  such  board  of  education  regarded  as 
tenant  and  should  withhold  normal  tax,  subject  to  exemptions  claimed. 

A  lessee  paying  rent  in  excess  of  $3,000  under  lease  from  two  or 


168  TREASURY  DECISIONS 

more  individuals  must  make  deductions  from  all  payments  in  excess 
of  $3,000,  unless  certificates  of  exemption  are  filed.  He  should  ascer- 
tain in  what  proportion  rent  is  divided  by  use  of  Revised  Form  1000B, 
which  may  be  executed  by  one  of  the  parties  in  interest,  the  others 
executing  Form  1007.  Withholding  should  be  made  from  income  of 
individuals  and  not  aggregate  amount  paid.  Situation  is  not  altered  if 
lessors  are  husband  and  wife  if  their  individual  interests  are  separate. 
(T.  D.  2090.) 

Rental  and  Royalties:  In  all  cases  where  rental  or  royalties  accrue 
under  terms  of  _  lease  or  agreement  which  grant  to  lessee  certain  lands 
and  right  to  mine  or  produce  therefrom,  upon  payment  of  rental  fixed 
and  determinable  as  to  amount  of  payment,  a  royalty  is  based  on  cer- 
tain fixed  sum  or  percentage  of  value,  payments  of  such  rentals  or 
royalties  when  they  in  part  represent  a  partial  return  of  capital  origi- 
nally invested  in  lands,  will  not  be  subject  to  withholding  of  normal  tax 
at  source. 

Reserves  for  Losses  Not  Deductible:  Reserves  to  take  care  of 
anticipated  or  probable  losses  are  not  a  proper  deduction  from  gross 
income.  (Art.  126,  Reg.  33.) 

Annual  Return,  Return  When  and  by  Whom  To  Be  Filed:  Each 
person  of  lawful  age  whose  net  income  is  $3,000  or  over  shall  on  or 
before  the  4th  day  of  March,  1914,  and  on  or  before  the  4th  day  of 
March  each  year  thereafter,  shall  file  an  accurate  return  of  income 
under  oath  except  as  herein  provided.  (Art  15,  Reg.  33.) 

Returns  May  Be  Made  by  an  Agent  in  the  Case  of  Illness,  Absence 
or  Non-Residence:  When  by  reason  ot  minority,  insanity,  absence, 
sickness  or  other  disability,  an  individual  is  unable  to  make  his  own 
return,  same  shall  be  made  by  his  guardian  or  authorized  agent.  ^/\rc 
17,  Reg.  33.)  Notice  of  failure  to  make  return  will  be  served  upon  such 
guardian  or  agent. 

Return  Should  Be  Made  by  Principal  Rather  Than  Attorney  in  Fact: 
A  power  of  attorney  does  not  constitute  a  fiduciary  relationship  within 
the  meaning  of  the  income  tax  law  and  in  all  cases  where  no  legal  trust 
has  been  created  in  the  estate  controlled  by  said  agent  the  liability 
under  the  law  rests  with  the  principal.  (T.  D.  2137.) 

Return  May  Be  Required  Though  No  Tax  Due:  Every  person 
having  a  net  income  of  $3,000  or  more  for  the  calendar  year  is  required 
to  make  a  return  and  failure  to  file  a  return  will  be  enforced  regardless 
of  the  fact  that  net  income  may  be  less  than  the  exemption  to  which 
the  individual  is  entitled.  (T.  D.  2090.) 

Extension  of  Time  for  Filing  Returns:  may  be  given  by  collectors 
not  to  exceed  thirty  days  from  the  time  prescribed  by  law  in  which  to 
file  return  if  the  merits  of  the  case  require  such  extension  of  time. 
(T.  D.  1950.)  But  only  where  such  failure,  neglect  or  refusal  is  the 
result  of  "sickness  or  absence." 

When  return  is  not  filed  within  the  required  time  because  of  sick- 
ness or  absence,  extension  of  time  shall  be  granted  only  upon  written 
application  and  not  to  exceed  thirty  days  from  the  time  such  return 
is  required  to  be  filed  by  law.  (Art.  23,  Reg.  33.) 

Return,  Where  To  Be  Filed:  If  person  making  return  of  income 
has  his  place  of  business  in  district  in  which  he  resides  return  shall  be 
filed  with  the  collector  of  that  district.  If  principal  place  of  business  is 
elsewhere  return  shall  be  filed  in  the  district  in  which  said  business  is 
located.  (Art.  15,  Reg.  33.) 

Return,  Erroneous,  Correction  by  Taxpayer:  All  returns  should  be 
carefully  scrutinized,  if  improperly  prepared  should  be  returned  to  tax- 
payer for  correction,  with  instructions  that  if  a  new  return  is  to  be 
executed  a  notation  should  appear  showing  when  erroneous  return  was 


TREASURY  DECISIONS  169 

filed,  so  that  taxpayer  will   not  be  subjected  to  additional  tax  or  pen- 
alties for  failure  to  file  returns  within  period  prescribed  by  law. 

A  record  of  the  return  of  an  erroneous  return  to  the  taxpayer 
should  be  kept  by  the  collector  so  that  if  taxpayer  fails  to  amend  and 
forward  the  same,  collector  may  take  steps  to  secure  the  return. 

Monthly  List  Returns  to  Be  Accompanied  by  Exemption  Certifi- 
cates: Monthly  list  returns  shall  be  accompanied  by  all  certificates 
relating  thereto,  and  there  shall  also  accompany  said  returns  all  certifi- 
cates claiming  exemptions  and  reductions  which  are  not  required  to  be 
listed  thereon.  (Art.  35,  Reg.  33.) 

Return  Must  Be  Signed  and  Sworn  To:  Return  must  be  signed 
and  sworn  to  by  fiduciary  with  his  full  address.  If  fiduciary  is  an  or- 
ganization return  must  be  signed  and  sworn  to  by  president,  secretary, 
or  treasurer  of  said  organization.  (Art.  73,  Reg.  33.) 

Return  Not  Required  if  Exemption  and  Deduction  Equal  Payments: 
When  certificates  filed  claiming  exemptions,  the  full  extent  of  payments, 
no  return  is  required;  but  certificates  should  be  forwarded  to  proper  col- 
lector. Return,  certificates  or  both,  should  be  forwarded  to  collector 
subsequent  to  end  of  calendar  year,  but  not  later  than  March  1st,  of 
succeeding  year.  (T.  D.  2135.) 

Stock,  Record  Owner  Makes  Return  and  Pays  Tax:  Such  dividends 
on  stock  of  domestic  corporations  are  prima  facia  held  to  be  income 
to  record  owner  of  stock,  and  said  owner  liable  for  income  tax,  normal 
or  additional,  according  to  status,  unless  a  disclosure  of  actual  owner- 
ship is  made  to  Commissioner  of  Internal  Revenue,  showing  that  record 
owner  is  not  the  actual  owner.  Said  showing  shall  be  made  on  Form 
1087,  revised.  (T.  D.  2401.) 

Return  to  Be  Filed  Monthly  by  Withholding  Agents:  A  corpora- 
tion, having  bonded  indebtedness,  which  has  withheld  some  income 
during  preceding  month,  is  required  to  file  a  monthly  return,  Form  1012, 
showing  amount  withheld.  (T.  D.  2135.) 

Withholding  agents  required  to  file  in  duplicate  Form  1012,  giving 
list  of  all  coupons  on  interest  payments  made  on  which  normal  tax 
was  withheld,  and  shall  show  name  and  address  in  full  of  owners  of 
bonds,  amount  of  income,  amount  of  exemption  claimed,  amount  of 
income  on  which  withholding  agent  held  liable  for  tax,  and  tax  withheld. 

Forms  1012-A,  1012-B  and  1012-C  are  to  be  used  where  form  1012 
does  not  afford  sufficient  space  to  enter  all  items. 

Form  1012-D,  when  necessary  to  be  used,  shall  be  made  in  duplicate 
and  be  summary  of  monthly  list  return.  Form  1012,  as  made  by  with- 
holding agent  and  said  summary  and  list  attached,  when  properly  signed 
and  filed,  shall  constitute  complete  monthly  return  of  withholding  agent. 
(Art.  50,  Reg.  33.) 

Annual  Return  to  Be  Filed  by  Withholding  Agent  Receiving  Cou- 
pons Without  Certificates:  An  annual  list  return,  Form  1044-A,  re- 
quired to  be  made  by  such  withholding  agent,  showing  amount  of  tax 
withheld  during  preceding  year  on  income  of  this  character.  (Art.  53.) 
Reg.  33.) 

Date  for  Filing  Return:  "Last  due  date"  is  construed  to  mean  the 
last  day  upon  which  return  is  required  to  be  filed  in  accordance  with 
provisions  of  law,  or  the  last  day  of  the  period  not  exceeding  thirty 
days  covered  by  an  extension  of  time  granted  by  the  collector.  (Art. 
175,  Reg.  33.) 

If  return  is  made  and  placed  in  the  United  States  mail,  properly 
addressed  and  postage  paid  in  ample  time,  in  due  course  of  mail  to 
reach  the  office  of  collector  on  or  before  the  last  due  date,  no  penalty 
will  be  held  to  attach  though  return  may  not  be  actually  received  by 
such  officer  until  subsequent  to  that  date.  (Art.  174,  Reg.  33.) 


170  TREASURY  DECISIONS 

Sunday  and  Legal  Holidays:  When  last  due  date  for  filing  returns 
falls  on  Sunday  or  on  legal  holidays,  the  last  due  date  will  be  held  to  be 
the  next  day  following  such  Sunday  or  legal  holiday,  and  the  return 
should  be  made  to  the  collector  not  later  than  such  following  day,  or  if 
placed  in  the  mails  it  should  be  posted  in  ample  time  to  reach  the  collect- 
or's office,  under  ordinary  handling  of  mails  on  or  before  date  on  which 
return  is  thus  made  due  in  office  of  the  collector.  (Art.  176,  Reg.  33.) 

Returns,  Correction  of:  The  returns  of  annual  net  income  to  be  filed 
by  corporations  should  be  examined  closely  with  a  view  to  having  such 
returns  as  nearly  correct  as  possible  before  forwarding  to  this  office. 
(Letter  1148  to  Collectors.) 

Returns:  Verification  of  By  Commissioner  of  Internal  Revenue: 
For  the  purpose  of  verifying  returns,  made  pursuant  to  this  act,  the 
Commissioner  of  Internal  Revenue  may,  by  any  duly  authorized  revenue 
agent,  cause  books  of  such  corporation  to  be  examined,  and  if  such 
examination  discloses  a  corporation  is  liable  to  tax  in  addition  to  that 
vidual  policy  holder  as  shall  have  been  paid  back  or  credited  to  such 
previously  assessed,  or  assessable,  the  same  shall  be  assessed  and  shall 
be  payable  immediately  upon  notice  and  demand.  For  the  purpose  of 
such  examination,  the  books  of  corporation  shall  be  opened  to  examining 
officer,  or  shall  be  produced  for  this  purpose  upon  summons  issued  by 
any  properly  authorized  officer.  (Art.  186,  Reg.  33.) 

Returns  Constitute  Public  Records  and  Are  Open  to  Inspection 
Under  Certain  Restrictions:  The  supplementary  statement  shall  be  made 
a  part  of  the  return  form  describes  for  the  use  of  corporations  in  making 
returns  of  annual  net  income  is  by  express  terms  made  a  part  of  the 
return,  and  to  the  same  extent  the  return  constitutes  a  public  record 
and  is  open  to  inspection,  and  to  that  extent  the  supplementary  state- 
ment is  also  a  public  record  and  open  to  inspection  "only  upon  the  order 
of  the  President  under  rules  and  regulations  described  by  the  Secretary 
of  the  Treasury  and  approved  by  the  President."  (T.  D.  2137.) 

Return,  Made  by  Commissioner  of  Internal  Revenue:  In  case  of 
refusal  or  neglect  by  corporation,  etc.,  to  make  a  return,  and  in  case 
of  false  or  fraudulent  return,  the  Commissioner,  upon  discovery  thereof 
within  three  years  after  such  returns  are  due,  shall  make  a  return  upon 
information  obtained  in  manner  provided  in  the  Act.  (Art.  177,  Reg.  33.) 

Returns  of  Income,  Secrecy  of  Information  Contained  Therein: 
The  Income  Tax  Law  is  specific  and  mandatory  in  the  matter  ot  safe- 
guarding from  publicity  information  acquired  by  reason  of  its  require- 
ments relative  to  returns  of  income.  The  law  imposes  the  penalty  of 
"fine,  imprisonment,  dismissal  from  office,  and  forfeiture  of  right  to 
hold  office,  for  making  known  in  any  manner  not  provided  by  law  the 
amount  or  source  of  income,  or  any  particular  thereof  set  forth  or 
disclosed  in  any  income  return  by  any  person."  (T.  D.  2135.) 

All  internal  revenue  offices  will  preserve  as  inviolably  confidential 
all  income  tax  returns,  as  the  slightest  infraction  of  law  upon  this  sub- 
ject will  be  severely  punished.  (T.  D.  1962.) 

Return,  Notice  to  Delinquents  to  Make  Returns  Within  Ten  Days: 
Where  the  required  returns  are  not  filed  within  the  prescribed  time, 
either  by  individuals  or  corporations,  notice  on  Form  1045  should  in 
each  case  be  sent  to  the  delinquent.  (Art.  196,  Reg.  33.) 

Extension  of  Time  for  Filing  Annual  Return,  Corporations:  An 
extension  of  time  within  which  a  return  may  be  filed  can  in  no  case 
exceed  thirty  days  from  date  on  which  return  is  due  and  can  be  granted 
only  upon  written  application  to  the  collector,  and  in  case  of  sickness  or 
absence  of  an  officer  whose  signature  to  the  return  is  required,  such 
application  shall  be  made  prior  to  expiration  of  the  period  for  which 
extension  is  desired.  (Art.  173,  Reg.  33.) 


TREASURY  DECISIONS  171 

Returns,  Verification  of  by  Individuals  in  the  Naval  and  Military 
Establishment  of  the  United  States  at  Home  or  Abroad  in  Certain  Cases: 
For  the  purpose  of  verification  of  returns  of  income  by  persons  in  the 
naval  and  military  service  in  the  United  States  any  officer  in  the  naval 
or  military  service  of  the  United  States,  within  or  without  the  United 
States,  who  is  authorized  to  administer  oaths  under  the  provisions  of 
Section  4,  Act  of  July  27,  1892,  27  Statute  278,  providing  for  the  admin- 
istration of  oaths  for  the  purpose  of  military  justice  and  administration, 
or  under  the  provisions  of  the  Act  of  March  4,  1917,  providing  for 
administration  of  oaths  for  the  purpose  of  naval  justice  and  administra- 
tion, is  hereby  empowered  and  authorized  to  take  the  acknowledgment 
of  such  persons  making  returns  of  income. 

In  all  such  cases  the  certifying  officer  shall  place  under  his  name 
the  official  designation  under  which  he  acts.  (T.  D.  2534.) 

Royalties:  In  a  case  where  A  sells  to  B  under  contract  the  right 
to  manufacture  a  machine  upon  which  he  has  a  patent,  B  agreeing  to 
pay  as  a  royalty  a  certain  sum  of  money  for  each  machine  manufac- 
tured under  such  patent,  such  sum  is  considered  income  to  A,  and 
should  be  included  in  his  return. 

In  a  case  where  A  sells  to  B  for  lump  sum  patent  rights,  it  is  held 
that  the  difference  between  the  amount  received  and  the  aggregate 
amount  expended  by  him  in  perfecting  the  invention  and  obtaining 
patent  is  net  income  to  A  and  should  be  included  in  his  personal  re- 
turn (Deputy  Commissioner  L.  F.  Speer,  January  the  24th,  1916.) 

Royalties  From  Mines:  In  case  of  mines  operated  by  lessee  on  roy- 
alty basis,  it  is  held  that  lessor  disposing  of  his  ores  or  natural  deposits 
on  basis  of  royalties  has  measure  of  profit  in  every  ton  of  ore  disposed 
in  this  way,  and  that  so  much  of  gross  receipts  on  account  of  royalties 
in  excess  of  depletion,  plus  any  incidental  expenses  to  which  corpora- 
tion may  be  subject,  is  income  within  meaning  of  Income  Tax  Law 
and  should  be  so  returned  by  lessor  (T.  D.  2152.) 

Salaries  of  Officers  or  Employees  paid  upon  their  death  to  their 
widows  in  recognition  of  services  rendered  by  husband;  it  is  held  such 
income  is  a  gratuity,  if  no  services  rendered  by  the  widow  and  exempt 
from  taxation.  Such  a  payment,  however,  is  not  an  allowable  deduc- 
tion, as  an  item  of  expense  in  carrying  on  business,  and  should  not  be 
included  in  payer's  return.  (T.  D.  2090.) 

Securities;  Losses  Arising  from  Sale  of  Capital  Assets  and  Ma- 
turity of:  Losses  may  be  sustained  by  individuals  or  corporations  on 
personal  or  real  property.  Loss  to  be  deductible  must  be  an  absolute 
loss,  not  speculative,  and  must  be  actually  sustained  during  year  for 
which  deduction  is  sought  to  be  made;  and  ascertained  upon  closed 
transaction. 

A  loss  sustained  by  corporations  from  sale  or  dealings  in  personal 
or  real  property  growing  out  of  ownership  or  use  of  such  property, 
will  not  be  deductible,  unless  it  is  ascertained  and  determined  in  the 
above  sense,  within  the  taxable  year  in  which  deduction  is  sought  to 
be  made.  When  loss  under  this  heading  is  ascertained  to  be  deductible, 
entire  amount  of  loss  will  be  deductible  except  where  property,  in  con- 
nection with  which  loss  occurred,  was  acquired  prior  to  March  1st, 
1913.  (T.  D.  2005.) 

Separate  Maintenance  Fund  to  Wife:  Where  a  married  man  living 
apart  from  his  wife  pays  her  under  a  maintenance  agreement  assumes 
any  sum  of  money,  such  payment  is  taxable  and  subject  to  withholding 
at  source.  The  wife  may  have  benefit  of  exemptions. 

Shares  of  Beneficiaries,  Name,  Addresses:  A  fiduciary  shall  include 
in  his  return  name,  address  and  shares  of  stock  of  each  beneficiary. 
Also  opposite  name  of  each  beneficiary  amount  of  exemption  claimed 
and  amount  of  income  fiduciary  liable  and  amount  of  tax  withheld. 


172  TREASURY  DECISIONS 

Bank  and  Trust  Companies  May  Use  Facsimile  Signatures:  For  con- 
venience of  Banks  and  trust  companies  haying  large  number  of  ownership 
certificates  to  execute,  in  collection  of  interest  on  bonds,  it  is  pro- 
vided that  the  name  of  bank  or  trust  company  may  be  printed  and  fac- 
simile of  signature  of  person  authorized  to  sign  for  bank,  etc.,  in  execut- 
ing said  certificates  may  be  printed  or  stamped  on  certificate:  Provided 
in  all  such  cases,  a  certificate  of  authorization  is  filed  with  commissioner 
of  internal  revenue,  as  provided  by  T.  D.  2258. 

Signature,  Facsimile  May  Be  Used  by  Collecting  Agent  in  Signing 
Substituted  Certificates:  It  is  provided  that  name  of  bank  or  collecting 
agent  may  be  printed  or  stamped  and  that  facsimile  of  signature  of 
person  authorized  to  sign  said  certificate  for  bank  or  collecting  agent 
may  be  printed  or  stamped  on  certificate:  Provided,  that  in  all  such 
cases  there  shall  first  be  filed  with  the  Commissioner  of  Internal  Revenue 
a  certificate  of  such  authorization,  according  to  the  form  provided  in 
this  Treasury  Decision.  (T.  D.  1986.) 

Societies  Operating  Under  the  Lodge  System:  A  Society  operating 
under  "Lodge  System"  is  considered  one  organized  under  a  charter, 
with  properly  appointed  or  elected  officers,  with  meetings  at  stated  in- 
tervals, supported  by  assesments.  (Art.  89,  Reg.  33.) 

Source:  Guardians,  trustees,  executors,  administrators,  etc.,  and 
all  persons  acting  in  any  fiduciary  capacity,  and  associations  or  corpora- 
tions acting  in  capacity  of  fiduciary,  who  hold  in  trust  an  estate  for 
another,  or  others,  shall  be  designated  the  "Source"  for  purpose  of  col- 
lecting income  tax.  (T.  D.  2231.) 

Tabaxility  of  Stock  Dividends  Resulting  From  a  Capitalization  of 
Surplus  Earned  Prior  to  January  1,  1913.  Stock  Dividends  Held  To  Be 
Income.  U.  S.  Dist.  Court,  Southern  District  of  New  York.  Henry  R. 
Towne,  Plaintiff,  against  Mark  Eisner,  Collector.  242  Fed.  702,  June 
15,  1917. 

This  is  an  action  to  recover  income  taxes  paid  upon  stock  dividends 
under  protest.  The  directors  of  the  corporation,  of  which  plaintiff  was 
a  stockholder,  having  a  surplus,  all  of  which  was  earned  prior  to 
January  1,  1913,  voted  on  December  17,  1913,  to  transfer  $1,500,000 
thereof  to  its  capital  account  and  to  apply  the  same  to  the  payment  of 
an  issue  of  15,000  shares  of  new  stock  of  the  par  value  of  $100  a  share 
and  to  distribute  this  stock  pro  rata  among  stockholders  of  record  on 
December  26,  1913.  The  actual  distribution  was  made  January  2,  1914. 
The  effect  of  the  dividend  was  to  increase  the  capital  stock  from 
$3,000,000  to  $4,500,000  par.  The  plaintiff  was  holder  of  8,349  shares  of 
stock  of  the  company,  and  upon  distribution  of  stock  dividends  received 
4,174}^  more.  A  tax  of  $20,208.94  was  assessed  upon  his  stock  dividend 
which  he  paid  under  protest,  and  now  sues  to  recover. 

The  court  held  that  this  interest  is  derived  from  earnings  and 
may  be  really  of  much  greater  advantage  to  the  stockholder  than  the 
possibility  or  right  which  he  has  lost.  It  becomes  capital  of  the  cor- 
poration, but  in  his  hands  it  is  income,  and  in  many  respects  resembles 
the  common  extraordinary  cash  dividend  accompanied  by  a  right  to 
subscribe  for  additional  stock  at  part  to  an  amount  equivalent  to  the 
dividend  in  cash.  This  distribution  is  considered  income  as  far  as  the 
income  tax  law  is  concerned  and  as  such  is  taxable. 

Normal  Tax  on  Undivided  Annual  Net  Income  Withheld,  such 
tax  should  not  again  be  withheld  when  such  portion  of  income  is  actually 
distributed  to  the  beneficiary,  the  beneficiary  will  account  for  sums  so 
paid.  (T.  D.  2289.) 

Taxes  Paid  by  a  Tenant:  Taxes  paid  by  a  tenant  are  considered 
additional  payment  of  rent,  and  an  expense  in  carrying  on  business. 
(T.  D.  2090.)" 

Banks  paying  taxes  assessed  against  their  stockholders  because  of 
their  ownership  of  shares  of  stock  issued  by  such  bank  cannot  deduct 


TREASURY  DECISIONS  173 

the  amount  of  taxes  so  paid  in  making  their  return  unless  specially  au- 
thorized to  do  so  by  the  laws  of  the  State  in  which  they  do  business. 
The  shares  of  stock  are  the  property  of  the  stockholders,  and  such 
holders  are  primarily  liable  for  the  tax.  (Art.  154,  Reg.  33.) 

Bonds  Containing  Tax  Free  Covenant  Clause:  Stipulation  in  bond 
whereby  tax  which  may  be  assessed  against  them,  is  guaranteed,  is  a 
contract  wholly  between  corporation  and  stockholder  in  so  far  as 
Income  Tax  Law  applies.  Withholding  agent  responsible  for  normal 
tax  due  in  such  cases,  when  no  exemption  is  claimed.  (T.  D.  1948.) 
(T.  D.  2090.) 

Tax  Not  To  Be  Withheld  at  Source:  Proceeds  of  life  insurance 
policies  paid  upon  death  of  person  insured,  payments  credited  to  insured 
on  life  insurance  endowment  or  annuity  contracts,  upon  return  to  the 
insured  at  maturity  or  term  mentioned  in  the  contract  or  surrender  of 
same — all  of  which  shall  not  be  included  as  income  under  this  law,  but 
shall  not  be  construed  to  exempt  insurance  companies  from  withholding 
normal  tax  on  interest  income  paid  by  insurance  companies  to  bene- 
ficiaries  when  interest  exceeds  $3,000.  (T.  D.  1890.) 

Income  of  an  individual  which  is  not  fixed  and  payable  at  stated 
periods  should  not  be  withheld  at  source,  but  shall  be  listed  in  annual 
return  of  individual,  and  tax  paid  thereon  by  him.  Incomes  derived 
from  following  professions  come  under  this  head:  Farmers,  Merchants. 
(T.  D.  1890.)  Agents,  compensated  on  commission  basis,  Lawyers, 
Doctors,  Authors,  Inventors,  and  other  professional  persons,  whose  in- 
come is  irregular  and  indefinite. 

Such  persons  shall  make  returns  of  their  net  income,  provided  a 
total  income  from  all  sources  is  $3,000,  or  over. 

Liability  of  Tenant  Under  Covenant  in  Lease  to  Pay  All  Taxes  on 
Property:  Suter  et  al.  v.  Jordan  Marsh  Co.  113  N.  E.  580. 

Trustees  required  to  make  return  for  persons  for  whom  they  act. 
Where  they  make  distribution  within  taxable  period,  they  must  make 
return  withholding  normal  tax.  Where  they  act  for  an  individual  unde- 
termined, they  have  a  status  of  fiduciary  and  also  agent  for  such  bene- 
ficiaries, and  as  such  are  required  to  make  return  and  pay  tax  upon 
income  received.  For  the  purpose  of  income  tax,  effective  accumulation 
in  the  hands  of  trustees  is  held  to  be  equivalent  to  distribution  and 
sum  of  accumulation. 

In  case  of  trust  estates  where  terms  or  trust  or  will  or  decree  of 
court  providing  for  keeping  corpus  of  estate  intact  and  where  physical 
property  of  such  estate  has  suffered  depreciation  through  its  employ- 
ment in  business,  a  deduction  will  be  permitted  from  gross  income  for 
the  purpose  of  caring  for  such  depreciation.  Where  deduction  is  held 
by  a  fiduciary  for  making  good  such  depreciation  fiduciaries  should  set 
forth  in  return  provisions  of  will,  trust  or  decree  requiring  depreciation 
reduction  where  any  exists  or  that  may  occur. 

Nothing  in  this  regulation  shall  be  construed  to  deny  right  of 
trustees  to  make  reductions  from  gross  income  for  expenses  incurred 
for  repairs  and  such  other  necessary  expenses  necessary  for  the  preser- 
vation of  the  corpus  of  the  estate.  (T.  D.  2267.) 

Compensation  for  Services  as  Trustee:  If  no  determination  was 
made  of  the  amount  due  the  trustee  of  an  estate  as  compensation  for 
his  services  over  a  period  of  years  until  the  trust  was  terminated, 
amount  allowed  him  to  be  returned  in  full  subject  to  deductions  as  in- 
come for  the  year  in  which  paid  and  should  not  be  pro  rated  over  a 
length  of  time  that  he  served  as  trustee.  (T.  D.  2135.) 

Widows  required  to  file  return  on  Form  1040,  revised,  in  her  own 
behalf  if  her  entire  income  for  the  calendar  year  during  which  husband 
dies  amounts  to  $3,000  or  more  should  claim  specific  exemption.  (T.  D. 
2135.) 


174  TREASURY  DECISIONS 

Taxes  Withheld,  When  To  Be  Paid:  "Amount  of  tax  withheld 
during  the  year  for  which  list  is  made  may  be  paid  to  the  collector  at 
time  list  is  filed." 

In  Order  That  Persons  Whose  Income  Tax  Is  Withheld  When  Paid 
at  Source,  May  Have  Opportunity  to  file  with  source  certificate  claiming 
benefit  of  the  deductions  and  exemptions  provided  by  the  law,  withhold- 
ing agent  will  not  pay  to  collectors  tax  withheld  by  them  under  law  until 
after  time  for  filing  claims  for  deductions  and  exemptions  has  expired. 
(T.  D.  1965.) 

Amount  withheld  should  not  be  forwarded  to  collector  until  thirty 
days  prior  to  March  1st,  of  year  succeeding  that  in  which  tax  withheld. 
(T.  D.  2135.) 

Fiscal  Year:  No  return  purporting  to  be  rendered  for  a  period 
other  than  the  last  day  of  some  month  should  be  forwarded  to  this 
office,  unless  such  return  is  "final"  and  made  to  that  date  that  cor- 
poration ceased  business.  (Letter  No.  1148  to  collectors.) 

Any  corporation,  joint-stock  company,  etc.,  subject  to  tax  imposed 
by  this  act,  may,  at  its  option,  have  tax  payable  computed  upon  the 
basis  of  net  income  arising  or  accruing  from  all  sources  during  its  fis- 
cal year,  provided  that  it  shall  designate  the  last  day  of  the  month 
selected  as  the  month  in  which  its  fiscal  year  shall  close  as  the  day  of 
the  closing  of  its  fiscal  year,  and  shall  not  less  than  thirty  days  prior 
to  date  upon  which  its  annual  return  is  to  be  filed,  give  notice,  in  writ- 
ing, to  the  collector  of  Internal  Revenue  of  the  district  in  which  its 
principal  place  of  business  is  located,  of  the  day  it  has  just  designated 
as  the  closing  of  such  fiscal  year.  (Art.  165,  Reg.  33.) 

All  corporations  are  required  to  make  their  returns  of  annual  net 
income  on  basis  of  the  calendar  year  and  to  file  such  returns  on  the 
first  day  of  March  next  following.  March  1st,  is  therefore,  due  date 
for  returns  of  all  corporations.  This  due  date  can  be  postponed  only  in 
accordance  with  some  legal  or  authorized  action.  Unless  such  action 
is  taken  within  the  prescribed  time,  all  corporations  in  existence  at  the 
preceding  December  1st,  and  failure  to  take  such  action  to  file  a  re- 
turn will  be  held  to  be  delinquent,  and  subject  to  50%  additional  tax 
under  penalty  of  the  law. 

The  filing  of  returns  at  any  date  other  than  on  or  before  March 
1st,  and  on  the  basis  of  the  calendar  year,  can  be  authorized  only  in 
cases  wherein  corporations,  not  less  than  thirty  days  prior  to  March 
1st,  give  notice  to  collector  of  the  district  in  which  are  located  the 
principal  place  of  business,  designating  in  such  notice  the  last  day  of  the 
month  as  the  close  of  their  fiscal  year. 

In  this  case  the  corporations  will  make  their  returns  for  the  year  so 
established,  and  will  file  their  return  on  or  before  the  last  day  of  the 
sixty  day  period  next  following  the  date  designated  as  the  close  of  the 
fiscal  year. 


INDEX 

War  Tax   Law— Act  of  October  3,   1917 


Abatement,  Claim  for 16 

Admissions,  Defined  43 

— Tax  on  42 

Alcohol  and  Wines,  Mailing  of 59 

Ale,  Tax  on 31 

Aliens,  Withholding  Tax 73 

Amendments  59 

— To  Munitions  Tax 25 

Automobiles,  Tax  on 39 


Beer,  Tax  on 31 

Boats,  Tax  on 42 

Bonds  44 

Bond,  Indemnity  and  Surety, 

Stamp  Tax  on 47 

Bonds,  Stamp  Tax  on 47 

Brandy,  Tax  on 32 

Business,  Change  of  Ownership. . .  22 
— Foreign,  Excess  Profit  Tax  on  14 
— If  Not  Engaged  in  During 

Prewar  Period,  Profits  Tax  on  15 


Cameras,  Tax  on 41 

Capital  Invested  Defined 20 

Capital  Invested  Undeterminable.  22 

Capital,  Nominal,  Defined 22 

Capital  Stock  Issue,  Tax  on 47 

Capital  Stock,  Sale  or  Transfer, 

Tax  on  48 

Carbonic  Acid,  Tax  on 33 

Carriers  Exempt  37 

Casualty  Insurance,  Tax  on 38 

Certificates  of  Indebtedness,  Tax 

on  47 

Champagne,  Tax  on 31 

Checks,  Tax  on 49 

Chewing  Gum,  Tax  on 41 

Cigarette  Paper,  Tax  on 35 

Cigarettes,  Tax  on 33 

Cigars,  Tax  on 33 

Collections  and  Returns 37 

Computation  of  Income  Tax 11 

Continuation  of  Business 15 

Contract  of  Sale  Made  Prior  to 

May  9th,  1917,  to  Be  Executed 

After  October  3,  1917 54 

Contributions  Exempt  from  Tax..  19 

Conveyances,  Tax  on 50 

Cordials,  Tax  on 31 

Corporations,  Income  Tax 10 


Debentures  44 

Debentures,  tax  on 47 

Deductions,  Determination  of 16 

— Excess  Profit  Tax 12 

Deeds,  Tax  on 50 

Definitions  of  Invested  Capital...  20 

— Terms  Defined  II 

Distilled  Spirits,  Tax  on 25 

Drafts,  Tax  on 49 

Drugs,  Tax  on 40 

Dues,  Club,  Tax  on 43 


Entries,  Custom  House,  Tax  on.  .  .    50 
Estate  Tax,  Exemptions  ..........   53 

Estate,  Tax  Rates  on.  .  .  .  .........   52 

Excess   Profits   Tax  ..............    12 

Exempt,   Territory    ........  .  .....    11 

Exemption  Beverages    ...........    29 

Exemptions,  Excess  Profits  Tax..   13 
Exemption    o  f    Government    and 
Municipal    Indebtedness  ......   44 

Exemptions,  Individual   ..........      8 

—  Of  Public   Utility   and   Insur- 
ance Tax  ..................  37-39 

—  Sale  and  Produce  on  Exchange  48 
Express  Shipments,   Tax  on  ......    36 

Extracts,   Tax   on  ................   32 


Fees,   Tax  on  ....................   43 

Films,  Tax  on  Moving  Picture...   40 
Floor-Stock,  Tax  on  ............  28-35 

Foreign    Business,    Excess    Profits 

Tax  on    .....................   15 

Foreign,  Capital  Invested  Defined.   22 
Fraction  of  Cent  Disregarded....   55 

Free  Postage    ...................   56 

Freight,   Tax   on  .................    35 


Gauging  of  Spirits,  Regulations..  2? 
General  Provisions  of  Excess 

Profits  Tax  Law 23 

General  Provisions  of  Beverage 

Tax  Law  29 

Gifts,  Exempt  from  Tax 19 


Importation  of  Spirits   Prohibited  27 
Imports  and  Exports,  West  Indies 
Islands,  Tax  on 53 


176 


INDEX 


Income,  Net,  Ascertainment  of.. 16-18 
— Computation   of   Individual...    11 

— Low   Prewar   Earnings 15 

Income    Tax — Corporations    10 

Individuals'   Capital   Invested   De- 
fined     21 

Individual    Normal    Tax 5 

Insurance,  Life,  Tax  on 38 

Internal   Revenue   Laws  Extended  46 


Jewelry,  Tax  on. 


40 


Lager  Beer,  Tax  on 31 

Life  Insurance,  Tax  on 38 

Liquors,  Removal  of 31 

— M— 

Machines,  Musical,  Tax  on 40 

Mailing  Alcohols  and  Wines 59 

Meters,  Installation  of 30 

Mineral  Waters,  Tax  on 33 

Miscellaneous     Provisions     Under 

Postal   Rates    58 

Monthly  Returns  of  Mineral  Wa- 
ters      33 

Munitions  Tax   25 

Musical    Instruments,    Tax   on....  40 

— »— 

Newspapers,  Tax  on  Mailing  of . . .  57 

Normal    Individual    Tax 5 

Ownership,   Change   of  Business..  22 

— P — 

Parcel  Post,   Tax  on 51 

Partnerships,   Excess    Profits    Tax 

on    18 

Partnership,   Return  by 23 

Passengers,   Tax   on 36 

Patent  Medicines,  Tax  on 40 

Payment,     Form    of,    Import    and 

Export  Tax   55 

Payment    of    Income    Tax    in    Ad- 
vance and   Excess   Profit   Tax 

in  Advance    55 

Payor  for  Services  to  Pay  Taxes.  37 
Penalties  for  Failure  to  Make  Re- 
turns     54 

Penalty    for    Making    Fraudulent 

Returns 54 

Penalty  on  Beverage  Tax  Stamps  30 

Penalty,  Stamp  Tax 45 

Perfumes,    Tax    on 26 

Periodicals,      Tax     on      Religious, 

Educational,  etc 58 

Pipe   Lines,   Tax  on • 37 

Playing  Cards,  Tax  on 50 

Policy,  Issuance  of,  Tax  on 38 

Porter,    Tax   on 31 

Postage,  Free 56 

Postal  Rates 56 


Power   of  Attorney,   Tax  on 50 

Prewar  Period,  If  Not  Engaged  in 

Business  During    15 

Proxies,  Tax  on i 50 

Publication  Provisions  Under  Pos- 
tal Rates   56 

Provisions,   Administrative    53 

— R— 

Radio  Messages,  Tax  on 37 

Refunds    25 

Regulation  as  to  Transfer,  Gaug- 
ing,  storing,  etc.,   of   Spirits..    27 
Regulation  as  to  Packing  and  Can- 
cellation of  Stamps 34 

Reorganization    of   Business 15 

Repeal,  Excess  Profits  Tax  Law  of 

March  3rd,  1917 23 

Returns    and    Collections 37 

Returns   on    Admissions 43 

Returns,  Foreign  Partnerships.  ...    23 
Returns    on    Public    Utilities    and 

Insurance  Tax   39 

Returns  on  Tax  Paid  Articles.  .41-53 


Salaries  of  Postmasters  ..........  58 

Sale  of  Produce  on  Exchange,  Tax 

on   ..........................  48 

Sirups,  Tax  on  ...................  32 

Snuff,  Tax  on  ....................  34 

Soft  Drinks,  Tax  on  .............  33 

Sparkling  Wines,  Tax  on  .........  31 

Spirits  for  Non-Beverage  Pur- 

poses, Tax  on  ................  28 

—  Regulation  ..................  28 

Sporting  Goods,  Tax  on  ..........  40 

Stamps,  Adhesive  Regulations....  45 

—  Cancellation   of    .............  44 

Stamps       Furnished       Postmaster 

General    .....................  46 

Stamp  Provisions    ...............  30 

Stamp  Tax  Penalties  .............  45 

Stock  on  Hand,  Beverages,  Tax  on  2S 

—  Cigars,  Tobacco,  Tax  on  ......  35 

—  Excessive   ...................  31 

—  War  Excessive  Tax  on  .......  41 

Storing  of  Spirits,  Tax  on  ........  27 

Sur-tax,  Individuals  .............  6 


Tax  on  — 

Admissions    ...................    42 

Ale    ...........................    31 

Automobiles    ..................    39 

Beer  ..........................    31 

Boats   .........................    42 

Bond  of  Indemnity  and   Surety.    47 
Brandy    .......................    32 

Brandy     and     Wine     Used      for 
Fortification  .................    32 

Cameras   ......................    41 

Capital  Stock  Issue  ............    47 

Capital  Stock  Sale  or  Transfer.    48 


INDEX 


177 


Carbonic  Acid    33 

Casualty  Insurance  Policies....   38 
Certificates  of  Indebtedness. ...    47 

Checks    49 

Chewing   Gum    41 

Cigarette    Paper    35 

Cigarettes    33 

Cigars  33 

Conveyances    50 

Cordials    31 

Debentures    47 

Deeds    50 

Distilled    Spirits    25 

Drafts    49 

Drugs    40 

Dues    43 

Entries,    Custom    House 50 

Estate 52 

Excess  Profits    12 

Exchange,  Sale  of  Produce  on..   48 

Express 36 

Extracts   32 

Fees     43 

Films,  Moving  Picture 40 

Fire   Insurance  Policies 38 

Floor-Stock    35 

Freight 35 

Issuance   of  Policies 38 

Jewelry    40 

Lager  Beer 31 

Life  Insurance  Policies 38 

Liquors     25 

Machines    40 

Marine  Insurance  Policies 38 

Medicines 40 

Mineral  Waters   33 

Musical  Instruments    40 

Newspapers  57 

Parcel  Post 51 

Passage 36 

Patent  Medicines 40 

Perfumes   26 

Pipe-Line    37 

Playing  Cards    50 

Power  of  Attorney 50 

Porter   31 

Produce,    Sale   onN  Exchange ....   48 

Proxies   50 

Radio     37 

Rectified  or  Unlawfully  Refined 

Spirits     29 

Sirups    32 

Soft  drinks    33 

Sparkling  Wines    31 

Sporting  Goods    40 

Stock  on  Hand 28-35-41 

Telegraph     37 

Telephone     37 

Tickets,  Passage   36 

Tobacco    34 

Toilet  Articles   40 

Vermuth    31 

Warehouses,  Custom   Bonded...    50 


Wines    31 

Yachts    42 

Tax  Stamps  on  Hand 54 

Telegraph,  Tax  on 37 

Telephone,  Tax  on 37 

Tickets,  Passage,  Tax  on 36 


Vermuth,   Tax  on. 


31 


Warehouses,  Custom  Bonded,  Tax 

on     50 

Wines,    Tax    on 31 

— T— 

Yachts,  Tax  on 42 

INCOME  TAX  AMENDMENTS 

Aliens,  Withholding  Income  of...  73 

Contributions    61 

Corporate  Deductions    70 

Corporate  Foreign  Deductions....  72 

Deductions  Allowed   61 

Deductions  Allowed  Non-Resident 

Aliens    61 

Deductions,  Corporate   70 

Deductions,  Foreign  Corporations.  72 

Deductions,  Personal   62 

Dividends  Deferred    77 

Dividends  Defined   77 

Exemptions    60 

General  Provisions   68 

Gifts    61 

Information        to       Commissioner 

Compulsory 74 

Insurance  Not  Deductible 77 

Invalidating  Clause    78 


License 


68 


Penalty  for  Failure  to  File  Return  74 

Release   of  Withheld   Taxes 77 

Repeal  of  Subdivision  (d)  and  (e) 
of  Section  (9)  Act  of  September 

8th,    1916    68 

Repeal  of  Subdivision   (d)   Section 

(8)  of  September  8th,  1916 64 

Return,  Penalty  for  Failure  to  File  74 
Returns  by  Brokers 75 

Withheld   Taxes   Released 77 

Withholding  Income  of  Non-Resi- 
dent   Aliens     72 


178 


INDEX 


Treasury  Decisions — Citations 


Abatement — or  refund  of  taxes, 
form  to  be  used 81 

— Claim    for    refund    of    excess 

amount    withheld   at   source..   81 
Accounts — Kept     on     basis     other 
than    of    actual    receipts    and 
disbursements     81 

— Payable 81 

— Receivable  are  income  for  the 

year  created    82 

Actual  Value — At  which  stock  is 
carried  on  the  books  of  the 
owner  is  not  conclusive  evi- 
dence of  its  actual  value....  82 

Additions — and  betterments 82 

Administrations — expenses    of,    of 

an  estate    82 

Ag-ents — not  acting  in  fiduciary 
capacity  82 

— Real   estate    82 

— Withholding  agent's  return 
when  form  1008  is  filed 82 

— Withholding,  debtor  may  ap- 
point    83 

— Paying,  notice  of  appointment 
of  83 

— Authorized  may  sign  certifi- 
cates    83 

— Withholding  may  substitute 
their  own  certificates  for  cer- 
tificates attached  to  coupons 
presented  for  collection 83 

— Withholding,  annual  list  re- 
turns of  83 

— Withholding,  not  required  to 
forward  tax  withheld 83 

— Tax     deducted     by     collecting 
agency,  debtor  does  not  again 
deduct  tax,  but  in  lieu  there- 
of delivers  to  collector  certifi- 
cates of  such  collecting  agency  83 

— Of  alien    83 

— Real  estate,  alien 83 

— Life  insurance,  commission 
retained  by  83 

— Fiscal,  and  foreign  corpora- 
tions defined  83 

— Interest  on  foreign  registered 
bonds  payable  to  fiscal  agents 
in  the  United  States 84 

— License  required  for  branch 
offices  of  collecting  agents...  84 

— Foreign      corporations      doing 

business  by   84 

Agricultural  organizations 84 

Aliens — Resident    84 

— Intending  to  become  perma- 
nent residents  .  .  85 


— Individuals,  non-resident 85 

— Royalties  received  by  non- 
resident    85 

— Interest  on  bonds,  dividends..   85 

— Non-resident,  additional   tax..   85 

— Dividends  on  stock  of  domes- 
tic corporations  received  by 
non-resident  85 

— Method  of  claiming  exemption 
by  non-resident  85 

— Exemption  may  be  claimed  for 
non-resident  by  responsible 
bank 85 

— Returns  and  payment  of  tax 
by  non-resident  85 

— Returns  in  payment  of  tax  by 
agents  or  representatives  of. .  86 

— Agent   of    86 

— Real  estate  agent 82 

— Non-resident,  returns  and  pay- 
ment of  tax  on  income  from 
domestic  corporations 86 

— Responsibilities  of  agents,  for 
non-resident,  owners  of  do- 
mestic stock  and  bonds 86 

— Non-resident  beneficiary,  re- 
turns and  payment  by  admin- 
istrators, executors  or  trustees  86 

— Non-resident,  deduction  at  the 
source  on  miscellaneous  in- 
come    86 

— Non-resident,  deductions  for 
expenses,  etc.,  may  be  claimed 
at  the  source 87 

— Non-resident,  deduction  of  tax 
at  the  source  on  corporate 
obligations  87 

— Non-resident,  ownership  certi- 
ficates shall  accompany  cou- 
pons, etc 87 

— Non-resident,  certificates  may 
be  printed  in  two  languages..  87 

— Non-resident,  endorsement  by 
responsible  agent  not  required  87 

— Non-resident,  specific  exemp- 
tions may  not  be  claimed  at 
the  source  by 87 

— Non-resident,  exemptions  may 
be  claimed  by  responsible 
banks 87 

— Partnerships,  non-resident,  tax 
deductible  at  source  of  inter- 
est from  domestic  obligations 
accruing  to  87 

— Non-resident  authorization  of 
accep£ance  of  form  1001,  prior 
to  January  1st,  1917,  when 
stamped  "not  exempt" 88 


INDEX 


179 


— Stock  owned  by  non-resident 
alien  corporations  or  firm  re- 
ported in  name  of  citizen  or 
resident  of  the  United  States.  88 

— Stock  record  owner  not  to 
make  return  and  pay  tax  for 
non-resident  alien  actual  own- 
er of  partnership 88 

— Returns  and  payment  of  taxes 
for  non-resident  alien  corpora- 
tions receiving  from  domestic 
corporate  obligations  through 
representative  in  the  United 
States  88 

— Method  of  claiming-  exemption 
by  non-resident  aliens  on  for- 
eign dividends  payable  in  the 
United  States  89 

— Method  of  claiming  exemption 
by  non-resident  alien  on  bonds 
when  presenting  coupons  to 
fiscal  agents  in  the  United 
States  89 

— Exemption  may  be  claimed  for 
non-resident  by  responsible 
banks 89 

— Liability  of  foreign  fiduciaries 
for  non-resident  beneficiaries.  89 

— Refund  to  non-resident  at  end 
of  year  amounts  in  excess  of 
liability  withheld  at  source 
during  the  year 89 

— Income  tax  liability  of  banks 
on  dividends  deposited  direct 
by  debtor  corporation  to  credit 
of  non-resident  stockholders.  90 

— Payment  of  tax  by  non-resi- 
dent    90 

— Dividends  paid  to  non-resi- 
dent partnerships  as  record 
owners  of  domestic  stock....  90 

— Withholding  tax  at  the  source 
on  stock  dividends  paid  to 

non-resident  corporations 90 

Alimony — Considered     a     personal 

expense   91 

Appreciation — Of  value  of  capital 

assets  not  evidenced 91 

Assessments — On  stocks §2 

— Voluntary,  paid  to  make  good 
deficit  92 

— Special,  paid  to  local  benefits.   92 

— and  payment  of  tax,  amended 
return  92 

— Not  required  when  audit  re- 
veals necessity  for  further 
tax  92 

— Notice  of,  may  lawfully  be 
given  by  mail 92 

— Life   insurance   companies....   92 

— Insurance  companies,  foreign 
assessments 93 


— Tax,  for  fiscal  year 93 

— Notice  of,  and  demand  by  col- 
lector for  tax,  penalty  and  in- 
terest    93 

— Suits  to  restrain,  or  collection 

of  taxes   93 

— Appreciation  in  value  of  cap- 
ital, not  evidenced  by  sale  or 

other  disposition   thereof 93 

Associations  —  Agricultural      and 

horticultural    94 

— Fruit  growers 94 

— Domestic  building  and  loan..   94 


Bank — Private,  income  from 94 

— Owned  by  individual  or  part- 
nership    95 

— Private,  no  formal  organiza- 
tion   , 95 

— Private,    as    partnerships 95 

— Deposits,    interest    on 95 

— Accounts,  interest  on 95 

— Bankers,  and  trust  companies  95 
— Receiving  for  collection  inter- 
est  orders   of   checks   bearing 

endorsement    95 

— Exemption  may  be  claimed  for 
non-resident  aliens  by  respon- 

ible 85 

— Private 95 

— Gross   income  of 96 

— Dividends  on  stock  of  Federal 

Reserve  are  exempt 96 

— Guaranty  fund   96 

— Taxes     assesed     against     the 

stockholders  of    96 

— Beneficiaries    96 

— Dividends     received     through 

fiduciaries     96 

— Individual   return    96 

Board,    lodging,    etc.,    received    in 

lieu  of  cash   for  rent 97 

Bond — May   be    required    by    com- 
missioner of  internal  revenue 

before  issuing  license 97 

— For  license  must  be  renewed 
annually  on  or  before  Janu- 
ary first  97 

— License  revoked  for  failure  to 

renew     97 

— License  issued  without 97 

— Amount  required  for  collect- 
ing agency  having  branch  of- 
fices    97 

Bonds — Fidelity,  premium  on 97 

— Containing    tax-free    covenant 

clause    97 

— Apportionment  of  losses  due  to 

sale  below  par 97 

— Loss  incurred  by  retirement 
of  .  97 


180 


INDEX 


— Retirement   of    98 

— Purchased  by  trustee  under 
mortgage  deed  of  trust  not  re- 
quired    98 

— Each  issue  require  separate 
certificate  of  ownership 98 

— Certificates  to  be  executed  by 
individual  to  accompany  cou- 
pons in  case  of  registered. ...  98 

— Purchased  and  sale  of  between 
interest  dates  98 

— Foreign  owned,  belonging  to 
American  citizen  or  residents.  98 

— Tax  previously  withheld  may 
be  paid  to  creditor  on  filing 
certificate  of  exemption  in 
case  of  interest  on  registered.  98 

— Interest  on  foreign  registered 
payable  in  the  United  States 

to  fiscal  agents 84 

Bonn* — Tax    withheld    on     salary 

and   98 

Bonuses  —  Gifts,     gratuities     or 

bonuses  to  employees 99 

Bookkeeping1 — System  required 99 

— Corporations'  books  must  con- 
firm annual  returns 99 

— Corporations,  domestic,  return 
of  whose  books  are  kept 
abroad  99 

— Corporations  keeping  books  in 
accordance  with  standard  sys- 
tems of  accounting  make  their 
returns  on  basis  on  which 
their  books  are  kept,  provided 
the  books  so  kept  and  returns 
made  reflect  the  true  net  in- 
come of  the  corporation  of 
each  year  99 

— Accounting  for  dividends  dis- 
tributed by  a  corporation 
which  had  surplus  or  undi- 
vided profits  100 


Calendar   year    100 

Capital    stock — Proceeds    of,    sale 

of,  are  not  income 101 

— Outstanding,    paid    up 101 

— Paid  up  and  outstanding  when 
shares  are  without  par  vlue.  .101 

Cemetery    companies    102 

Certificates — Maturity  of  coupons 
require  certificates  of  owner- 
ship   102 

— To  be  executed  by  individuals 
to  accompany  coupons  in  case 

of  registered  bond 98 

— Address   on    102 

— Executed  by  domestic  corpora- 
tions, exempt  organizations, 
etc 102 


— Of  ownership,  debtor  must 
obtain  or  deduct  tax 102 

— To  be   executed 103 

— Tax  on  domestic  bonds,  etc., 
will  not  be  deducted  if  certifi- 
cate of  exemption  is  filed 102 

— Ownership,  for  non-resident 
alien  firms  to  be  used  with 
coupons  detached  from  bonds 
of  domestic  corporations,  etc.  .102 

— Withholding  agents  may  sub- 
stitute their  own  for  certifi- 
cates attached  to  coupons  pre- 
sented for  collection 83 

— For  which  substitution  is 
made  to  be  forwarded  to 
Washington  each  month 103 

— Of  ownership  not  required  to 
accompany  interest  orders  or 
checks  103 

— Filed  by  domestic  owners  of 
record  disclosing  actual  own- 
ership to  be  filed  monthly. .  .103 

— Substitute  certificates,  entered 
on  monthly  list  returns 103 

— Claiming  full  exemption  need 
not  be  listed,  but  must  be  filed 
with  collector  at  usual  time..  103 

— Ownership,  to  be  used  by  non- 
resident alien  fiduciaries 104 

— Alien  non-resident  partner- 
ships to  file  ownership  certifi- 
cate   104 

— Partnerships,  foreign,  having 
place  of  business  in  the  United 
States  must  file  certificate  of 
ownership  to  prevent  deduc- 
tion at  source  on  interest  on 
corporate  bonds,  etc 104 

—Scrip    104 

— Investment    104 

— Return,  are  to  be  filed 104 

— Ownership    104 

— Each  issue  of  bonds  require 
separate  certificate  of  owner- 
ship    98 

— Of  ownership  not  filed,  first 
bank,  etc.,  receiving  coupons 
for  collection,  deducts  tax, 

using   its  own   certificate 105 

Claims  for  Refund — Limitation  on.  105 

— Defendent  in  suit  to  recover 
back  taxes  105 

— Statute  of  limitations,  bar  re- 
moved from  certain  claims  for 

refund   105 

Clubs — Social 

— May    register    as    an    exempt 

organization     105 

Collateral — Interest  on,  subject  to 
sale  or  hypothecation  in  busi- 
ness .  ..105 


INDEX 


181 


— Shares  without  par  value, 
computation  of  deductible  in- 
terest on  indebtedness 105 

— The  subject  of  sale 106 

Collections — Limitation:  No  three- 
year  limitation  to  right  of 
government  to  collect  taxes  by 
suit  or  otherwise 106 

— Waiver  of  three-year  limita- 
tion   107 

— Taxes,  suits  to  restrain  assess- 
ment or  collection  thereof....  93 

• — Taxes  wrongfully  collected, 
suits  for  recovery 107 

— Limitations     as     to     suits     of 

wrongfully   collected   taxes...  107 
Commissions — Are      properly     de- 
ductible   from    corpus    of 
estate    107 

— S  a  1  a  r  i  e  s,  commissions  and 
profit  sharing  107 

— Paid    salesmen    in    relation   to 

withholding-  at  source 108 

Companies  —  Contracting,  income 
of  108 

— Foreign     steamship,    expenses 

of    108 

Compromises 108 

Constitutionality  —  Corporations — 
of  Act  of  October  3,  1913,  was 
attacked  on  grounds  of  retro- 
active features 109 

— Of  Act  of  October  3,  1913,  was 
attacked  because  of  its  dis- 
criminating features  109 

—Of  the  Act  of  October  3,  1913.109 

— Retroactiveness  of  Act  of  Oc- 
tober 3,  1913 109 

Corporations — Dividends  on  stock 
of  domestic 137 

— Returns  and  payment  of  tax 
on  income  from  domestic,  to 
non-resident  aliens 86 

— Corporate-obligations,  to  non- 
resident aliens,  deduction  of 
tax  at  the  source  on 87 

— Undivided   surplus    109 

— Income    defined    109 

— Calculation  of  "cash  value"  of 
stock  dividends  110 

— Limited  partnerships  held  to 
be  110 

— Promissory  notes   of 110 

— Obligations  of  defined 110 

— Foreign,  not  having  place  of 
business  in  the  United  States 
or  doing  business  therein. ..  .110 

— Foreign  and  fiscal  corporations 
defined  83 

— Method  of  claiming  exemp- 
tions .  ..110 


— Constitutionality  of  act  of  Oc- 
tober 3,  1913,  attacked  on 
ground  of  alleged  retroactive 

features    109 

— Defined    110 

— Unless      specifically      exempt 

shall  file  a  return Ill 

— Subsidiaries Ill 

— Maintained  for  the  purpose  of 
protecting  brands,  trade  marks 
and  trade  names  are  subject 

to  return    Ill 

— Closed    Ill 

— Owned  by  exempt  organiza- 
tions  Ill 

— Operating  leased  or  purchased 

property    112 

— In  existence  but  part  of  year.  112 
— Organized  during  tax  year...  112 
— Organized   but   transacting  no 
business  within  year  of  its  or- 
ganization     112 

— Liquidating  during  tax  year.. 112 
— Dissolving    before    time    for 

making  return    113 

— Not   completely   organized. ..  .113 

— Foreign  113 

— Foreign,  tax  on 113 

— Foreign,      having      several 

branches  in  the  United  States.  113 
— Foreign,     doing     business     by 

agent    84 

— Tax  upon   113 

— Exempt,     include     foreign     as 

well  as  domestic 113 

— Specifically  exempt  class 113 

— Exempt,  are  subject  to  the 
withholding  provisions  of  act 

of  September  8,  1916 113 

— Exempt,  must  on  request  prove 

right  to  exemption 114 

— Whose   right   to   exemption   is 

questionable    114 

— Having  once   shown   their  ex- 
emption need  not  do  so  again.  114 
— Manufacturing,    gross    income 

of    114 

— Mercantile,  gross  income  of.. 114 
— Miscellaneous,     gross     income 

of    148 

— Conducting  more  than  one 
class  of  business,  gross  in- 
come of  114 

— Foreign  114 

— Foreign,  deriving  their  taxable 
income  solely  from  stocks  and 
bonds     of    domestic     corpora- 
tions, deductions  permitted. .  .114 
— Foreign,   interest  accrued  and 

paid  on  indebtedness 115 

— Shall  file  return  unless  spe- 
cifically exempt  115 


182 


INDEX 


— Changes   of  name 116 

— Notice  to,  if  returns  not  filed 
on  time  115 

— Foreign  and  domestic,  doing 
business  in  foreign  countries, 
extension  of  time  in  making 
returns  115 

— Returns  by,  must  be  made  on 
specified  forms  116 

— Forms  to  be  used  in  making 
returns  116 

— Supplementary  statements  on 
returns  116 

— Books  must  confirm  annual 
returns  99 

— Domestic,  return  of,  whose 
books  are  kept  abroad 99 

— Doing  business  on  the  Philip- 
pines and  Porto  Rico 117 

— Fines  against   117 

— Fines   against   officers 117 

— Penalties     117 

— Sale  of  assets  of  another  cor- 
poration, for  stock,  share  for 
share  of  like  par  value,  in  the 
new  vendee  corporation  to  an 
amount  equal  to  an  entire  is- 
sued capital  stock  of  the  old 
vendor  corporation,  which 
stock,  because  of  increased 
value  of  assets,  is  admittedly 
worth  double  par 117 

— Extension  of  time  for  filing 
income  tax  returns,  and  mak- 
ing returns  on  fiscal  year 
basis  118 

— Liquidating  during  the  past 
year,  final  return  of 118 

— Tax  of  6%  withheld  on  inter- 
est on  corporate  obligations 
payable  to  non-resident  for- 
eign corporations  on  and  after 
October  4th,  1917 118 

— Tax  to  be  deducted  at  source 
on  dividends  paid  on  stock 
actually  owned  by  non-resi- 
dent alien  corporations  not  en- 
gaged in  business,  etc.,  if 
paying  corporation  is  so  in- 
formed, although  record  own- 
ers are  non-resident  alien 
individual  or  partnership 118 

— Deduction  at  the  source  on 
corporate  security  interest 
payments  to  non-resident  alien 
co-partnerships  118 

— Deductions  on  tax  at  the 
source  on  dividends  paid  to 
non-resident  alien  corporations 

is  at  2%  rate 119 

Coupons — Maturity  of,  require  cer- 
tificates of  ownership 102 


— From  foreign  owned  bonds  be- 
longing to  domestic  corpora- 
tions   119 

— Without  certificates  received 
by  withholding  agents,  who 
should  file  monthly  return...  119 
Creditor* — Tax  previously  with- 
held may  be  paid  to  creditor 
on  filing  certificate  of  exemp- 
tion in  case  of  interest  on 
registered  bonds 98 


Damages    119 

Debtor — Defined   119 

— May     appoint     withholding 

agent    83 

Debts — Charged  off  on  recovery 
prior  to  January  1st,  1909 119 

—Bad 119 

— Manner  of  determining  when 
a  bad  debt  may  be  considered 
worthless  and  be  treated  as  a 

loss    119 

Decedents  —  Insane  or  insolvent 
persons;   delay  in  payment  of 
tax  from  estate 120 

— Income  accruing  to,  dying 
after  March  1st,  1913,  but  be- 
fore October  3d,  1913,  taxabil- 
ity of  120 

Deduction — Tax  need  not  be  de- 
ducted even  though  form  1019 
is  filed 120 

— Income,  items  deductible  and 
not  deductible  121 

— Inheritance  taxes  no  deducti- 
ble   121 

— Payment  in  aggregate  governs 
deduction  of  tax  at  source,  re- 
gardless of  varying  character, 
constituting  income  121 

— Real  estate  agents  not  re- 
quired to  deduct  and  withhold 
normal  tax  from  rents  col- 
lected    82 

— Quarters   121 

— Tax  withheld  to  be  paid  to  col- 
lector of  internal  revenue. ..  .121 

— Tax  deducted  at  source  not  to 
be  deducted  again  by  agent 
or  other  person 121 

— Tax  deducted  at  source,  per- 
sonal liability  for 121 

— Tax  not  subject  to  withhold- 
ing at  source  until  payment  is 
made  thereof  122 

— Claimed  at  time  of  receipt  of 
income  122 

— Tax  to  be  deducted  except  to 
extent  of  exemption  claims..  122 


INDEX 


183 


— Tax  on  domestic  bonds,  etc., 
will  not  be  deducted  if  cer- 
tificate of  exemption  filed....  102 

— Of  tax  at  source  applies  only  to 
normal  tax  on  individuals. ..  .122 

— Interest  which  constitutes  an 
allowable  deduction  ...122 

— Entertainment  money    122 

— Import  duties   122 

— Permanent  buildings  on  leased 
ground 122 

— Furniture  and  equipment,  re- 
newal of 123 

— Repairs   123 

— Life  insurance  in  favor  of  cor- 
porations   123 

— Salaries  paid  officers  and  em- 
ployees   123 

— Salaries  paid  to  national  guard 
men  while  on  federal  duty  are 
an  allowable  expense 123 

— Donations  for  welfare  of  em- 
ployees   123 

— Donations  made  for  purposes 
connected  with  operation  of 
property  limited  to  charitable 
institutions  123 

— Pensions   to   ex-employees. ..  .123 

— Bank  guaranty  fund 96 

— Railroads,  deductible  and  non- 
deductible,  expenses  of 123 

— Public  utility  under  contract 
with  state,  etc 124 

— Taxes;  paid  during  the  year 
are  deductible  124 

— Taxes;  excise  and  franchise 
taxes  are  deductible 124 

— Reserves  for  taxes  are  not  de- 
ductible   124 

— At  the  source  on  dividends. .  .124 

— For  expenses,  etc.,  may  be 
claimed  at  the  source  by  non- 
resident aliens 87 

— Of  tax  at  the  source  on  cor- 
porate obligations  from  in- 
come accruing  to  non-resident 
aliens  87 

— Of  cost  of  live  stock  pur- 
chased for  resale  is  allowable.  124 

— Allowed  to  citizens  or  resi- 
dents   124 

— Customs   duties   allowable. ..  .124 

— Losses  by  citizens  or  resident 
incurred  outside  of  business.  .125 

— Method  of;  dteterminingf  amount 
of  loss 125 

— Of  tax  at  source  on  interest 
from  domestic  obligations  ac- 
cruing to  non-resident  alien 
partnerships  87 

— Taxes,   not  deductible 125 


— Corporations,  foreign,  deriving 
their  taxable  income  solely 
from  stocks  or  bonds  of 
domestic  corporations,  deduc- 
tions permitted  114 

— Steamship  companies,  foreign, 

expenses  of 108 

— Of  tax  at  source  is  at  the  2 
per  cent  rate  on  all  taxable 
income  paid  on  or  after  Jan- 
uary 1st,  1917 125 

— Organization  expenses  repre- 
sent the  cost  of  the  charter  or 
franchise  of  the  corporation, 
and  do  not  constitute  an  al- 
lowable deduction  from  gross 

income 125 

— At  the  source  on  corporate 
security  interest  payments  to 
non-resident  alien  co-partner- 
ships    87 

— Reserve  deductible  by  insur- 
ance companies  125 

Definitions — "Head  of  family" 126 

Depletion  —  Individuals  and  cor- 
porations from  whose  property 
oil  or  gas  is  produced,  may 
deduct  from  gross  income  on 
account  of,  such  a  percentage 
of  the  fair  market  value  as  of 
March  1,  1913,  of  the  oil  or 
gas  properties,  if  acquired 
prior  to  that  date,  or  of  the 
cost  of  such  properties  if  ac- 
quired subsequent  to  that  date, 
as  the  reduction  in  flow  and 
production  of  the  year  for 
which  the  return  is  made,  is 
a  percentage  of  the  flow  and 
production  of  the  previous 

year   126 

Depreciation — Estimation  of 128 

— Allowance,   to  be  deductible.  .129 
— No  fixed  percentage  for  com- 
puting     130 

— Real    estate;    depreciation    of 

and  buildings  thereon 131 

— In  book  values 131 

— Reserve  fund,  investing  of...  131 

— Of  good  will 131 

— Of  patents   131 

— Patents,  computation  of  depre- 
ciation of 132 

— Of  timber  lands 132 

— And  appreciation  of  value  of 
capital  assets  not  evidenced 
by  receipt  of  cash  or  equiva- 
lent    91 

— As  an  allowable  deduction. .  .136 
— Deductible  by  citizens  or  resi- 
dents     136 


184 


INDEX 


— Oil,  gas  wells  and  mines,  de- 
pletion of  136 

— Corporations  leasing:  oil  or  gas 

territory   136 

— Corporations  operating  mines.  136 
— Depletion,  recording  on  books 

for  purpose  of  deduction. ..  .136 
— Allowance  and  treatment  of 
expense  for  repairs,  improve- 
ments on  buildings  built  on 
leaseholds  by  lessee  or  ac- 
quired as  part  of  purchased 

leasehold    136 

Dissolution — Corporations   dissolv- 
ing   before    time    for    making 

returns    113 

Dividend* — Deduction  at  the  source 

on    124 

— Received    through    fiduciaries 

by    beneficiaries 137 

— Stock,     calculation     of     "cash 

value"    138 

— Life  insurance  policies 137 

— In  the  hands  of  fiduciary 137 

— On  corporate  stock,  etc 137 

— In  hands  of  fiduciary 137 

— Declared  from  accumulated 
profits  during  life  of  decedent 
and  subsequent  to  March  1st, 
1913,  are  taxable  in  year  re- 
ceived   137 

— Paid  by  foreign  corporations.  137 
— On    stock    of    federal    reserve 

banks  are  exempt 96 

— Of  other  corporations 137 

— Received    from    subsidiaries.  .138 

— Stock  dividends   138 

— Cash  value  of  stock 138 

— Stockholdings,       compensation 

based  on  138 

— Accounting  for  dividends  dis- 
tributed by  a  corporation 
which  had  surplus  or  undivid- 
ed profits 109 

— Certificate  form  1087  to  dis- 
close actual  ownership  and 
claim  exemption  from  with- 
holding at  source  of  domestic 

dividend  payments    138 

— Paid  to  non-resident  alien 
partnerships  as  record  owners 

of  domestic  stock 90 

— withholding  tax  at  the  source 
on  stock  dividends  paid  to 
non-resident  alien  corpora- 
tions    87 

— Paid  in  liberay  loan  bonds 
are  taxable  income  to  stock- 
holders receiving  them  to  the 
same  extent  that  other  divi- 
dends are  taxable 138 


— Declared  from  depreciation  and 
depletion  reserve  139 

— Received  from  holding  com- 
pany declared  from  funds 
acquired  as  dividends  from 
operating  company,  declared 
from  funds  acquired  prior  to 
March  1,  1913 132 

— Paid  out  of  amount  set  aside 
to  cover  depreciation  and  de- 
pletion constitute  taxable  in- 
come to  the  stockholder  re- 
ceiving them  133 

— Tax  of  6%  withheld  on  inter- 
est on  corporate  obligations 
payable  to  non-resident  for- 
eign corporations  on  and  after 
October  4th,  1917 118 

— Declared  on  paid  by  subsidi- 
ary taxable  to  parent  corpora- 
tion when  received 133 

— Paid  by  a  lessee,  as  a  rental 
equivalent,  direct  to  share- 
holders of  a  corporation  leas- 
ing its  properties  to  another 
constitute  income  to  the  les- 
sor corporation  133 

— Received  by  stockholders  from 
1913  paid  from  surplus  earned 
prior  to  January  1,  1913,  con- 
stitute income  to  the  stock- 
holder   134 

Donations — Corporations;  to  fairs.  140 

— For  welfare  of  employees, 
donations  by  corporations. ..  .123 

— Made  for  purposes  connected 
with  operation  of  property 
limited  to  charitable  institu- 
tions   123 

Duties — 

— Import 122 


Endorsements — Not     required     on 
back   of   certificates 140 

— License  not  required  of  col- 
lecting agents  for  substitution 
of  certificates  140 

— On  check  when  certificates  of 
exemption  are  filed  with  debt- 
or in  case  of  registered  in- 
terest   140 

— Banks  receiving  for  collection 
interest  orders,  of  checks 

bearing    endorsement 95 

Endowment — Life  insurance,  etc.. 140 
Estates — Fiduciaries,  returns  prior 
to  settlements  of  estates 141 

— Income  undistributed  from 
trust  141 

— Return  of  income  accruing  to 
trust  .  141 


INDEX 


185 


Exchange — Of  coupon  interest  for 

funding  bonds    141 

Exemptions — May  be  claimed  for 
non-resident  aliens  by  respon- 
sible bank  85 

— Method  of  claiming  by  cor- 
porations, etc 110 

— Corporation  unless  specifically 
exempt  shall  file  a  return. ..  .111 

— Agricultural  organizations....   84 

— Co-operative  dairies  and  like 
organizations  134 

— From  income  tax  of  corpora- 
tion dividends  paid  in  the  form 
of  liberty  bonds 134 

— Application  of,  when  several 
members  of  the  family  invest 
in  new  liberty  bonds 135 

— Specific,  of  |200  for  each  child 
applicable  to  both  2%  taxes.. 135 

— Method  of  claiming  by  non- 
resident aliens 85 

— May  be  claimed  for  non-resi- 
dent aliens  by  responsible 
bank  85 

— Specific    135 

— Of  interest  on  United  States 
bonds  or  bonds  of  state  or 
political  subdivision 135 

— Of  expenses  incurred  in  earn- 
ing non-taxable  income 135 

— Miscellaneous   income    135 

— In  case  of  corporations,  ex- 
empt organizations,  partner- 
ships and  fiduciaries 139 

— Certificate  form  1063  not  re- 
quired on  payment  to  non- 
fiduciary  139 

— United  States,  state  or  polit- 
ical subdivision  obligations 
exempt  139 

— May  be  prorated  between  hus- 
band and  wife 139 

— Method  of  claiming  by  citizen 
or  resident  on  interest 140 

— Method  of  claiming  by  non- 
resident on  dividends 85 

— Method  of  claiming  by  non- 
resident    85 

— Aliens  on  foreign  dividends 
payable  in  the  United  States. . 

— Method  of  claiming  by  non- 
resident alien  on  bonds  when 
presenting  coupons  to  fiscal 
agent  in  the  United  States...  89 
Exempt  Organizations — Club  may 
register  as  an  exempt  organ- 
ization   105 

Expenses — Of  administration  of 
an  estate 82 

— Of  operation  and  maintenance.  142 
Extension — Because  of  absence  in 
foreign  country  142 


Family  Head— Defined  126 

Farm — and   farmers 142 

— Rents 142 

— Cost  of  live  stock 142 

— Machinery    142 

Fiduciaries — Are  subject  to  the 
payment  of  additional  tax  up- 
on incomes  received  for  the 
benefit  of  their  principals. ..  .142 

— Dividends  received  through, 
for  beneficiaries 137 

— Dividends  in  the  hands  of 

— Committee  for  incompetent 
considered  fiduciary  142 

— No  withholding  against  upon 
notice 142 

— Exemptions,  miscellaneous  in- 
come   139 

— Exemption  claim  on  interest 
on  corporate  securities 139 

— Procedure  when  waive  exemp- 
tion claim  on  interest  on  cor- 
porate securities  142 

— May  make  return  for  benefici- 
ary   143 

— Returns    prior   to    settlements 

of    estates 141 

Fines — Corporations,   fine  against.  117 

— Corporations,  fine  against  of- 
ficers   117 

Foreign  Governments — Tax  liabil- 
ity of  income  received  from 
sources  within  the  United 
States  by  foreign  governments 

or  their  resident  agent 143 

Forms — Income  tax  form  1012 
adapted  for  use  by  debtor  cor- 
poration when  reporting  in- 
come taxes  held  for  payments 

•  to  non-resident  alien  corpora- 
tions   143 

— Form  1044,  revision  of,  for 
monthly  list  return 143 

— Corporations,  forms  to  be  used 
in  making  returns 143 


Gift — Property   acquired   by 144 

Good  Will — Depreciation  of 144 

Government    Office — Expenses    of, 
and  employees,  for  quarters . . 

— H— 

Holding    Companies  —  Companies 
doing  business  under  the   old 

excise  tax  law 144 

— Dividends  received  from,  de- 
clared from  funds  acquired  as 
dividends  from  operating  com- 
pany, declared  from  funds 
acquired  prior  to  March  1, 
1913  132 


186 


INDEX 


HuBband — and  wife,  tax  computed 

on   separate    incomes 144 

— and  wife,  constitutionality 
of  specific  exemption  provi- 
sion   144 

— and  wife,  death  of 144 

— and  wife,  exemption  may  be 
prorated  between  139 


Identity  —  Individuals  presenting 
coupons  for  collection  without 
certificates  must  establish 

their  identity    145 

Improvement* — Additions  and  bet- 
terments made  by  tenant  cor- 
porations    82 

— Permanent  improvements  made 
under  rental  of  leased  con- 
tracts   145 

Income — Alien  individuals,  non- 
resident    85 

— Husband  and  wife,  tax  com- 
puted on  separate  incomes.  .  .144 

— Income  defined   148 

— Income  from  private  banks...   94 

— Tax  witheld  on  salary  and 
bonus  98 

— Commissions  from  renewal 
premiums  considered  income.  146 

— Farm  and  farmers 142 

—Rents     167 

— Rent  is  returnable  as  income 
in  the  year  received 146 

— Board,  lodging,  etc.,  received 
in  lieu  of  cash  for  rent 97 

— Promissory  note  received  in 
payment  equivalent  to  cash 
settlement  146 

— Accruing  to  minor  through 
natural  guardian  146 

— Proceeds  of  sale  of  rights  to 
subscribed  stock  146 

—Tax    146 

— Taxes  paid  by  banks  on  stock 
held  by  individuals 146 

— Accrued     146 

— Of  partnership  not  to  be  with- 
held at  source 147 

— Materials,  prorating  charges 
for  material  used  and  on 
hand  147 

— Tax  liability  of  income  re- 
ceived from  sources  within 
the  United  States  by  foreign 
governments  or  their  resident 
agent  143 

— Aggregate  of  taxable  income 
including  dividends,  payable  to 
a  beneficiary,  in  excess  of 
$3,000,  returns  should  be 
made  147 


— Excess  amounts  received  at 
maturity  of  series  of  shares 
in  a  building  association  on 
surrender  of  life  insurance 
policy  constitute  taxable  in- 
come   147 

— Of  persons  dying  after  March 
1st,  1913,  and  prior  to  October 
3rd,  1913,  liable  to  tax 147 

— Organization  expenses  repre- 
sent the  cost  of  the  charter 
or  franchise  of  the  corpora- 
tion, and  do  not  constitute  an 
allowable  deduction  from 
gross  income 125 

— Dividends  paid  in  liberty  loan 
bonds  are  taxable  income  to 
stockholders  receiving  them  to 
the  same  extent  that  other 
dividends  are  taxable 147 

— Exemptions,  miscellaneous  in- 
come   135 

— Returns  of  undistributed  in- 
come   147 

— Undistributed,  entered  on  form 
1041  by  fiduciaries 148 

— Accruing  to  decedent  dying 
after  March  1st,  1913,  but  be- 
fore October  3rd,  1913,  taxa- 
bility of 120 

— Individual  return  by  benefi- 
ciary   

— Items  deductible  and  not  de- 
ductible   121 

— Undistributed  from  trust  es- 
tates   141 

— Defined    148 

— Gross  income  of  banks  and 
other  financial  institutions. ...  96 

— Gross  income  of  insurance 
companies  148 

— Gross  income  of  manufactur- 
ing corporations  114 

— Gross  income  of  mercantile 
corporations  114 

— Gross  income  of  miscellaneous 
corporations  114 

— Of   contracting   companies. ..  .108 

— Gross  income  defined 114 

— Capital  stock,  proceeds  of,  sale 
of,  are  not  income 101 

— Gross  income  of  corporations 
conducting  more  than  one 
class  of  business 114 

— Royalties  received  from  les- 
see's income  148 

— Dividends  paid  by  a  lessee,  as 
a  rental  equivalent  direct  to 
shareholders  of  a  corporation 
leasing  its  properties  to  an- 
other constitute  income  to  the 
lessor  corporation  133 


INDEX 


187 


— Taxability  of  income  accruing 
to  decedent  dying  after  March 
1,  1913,  but  before  October  3, 
1913  149 

— Dividends  received  by  stock- 
holder from  1913,  paid  from 
surplus  earned  prior  to  Janu- 
ary 1,  1913,  constitute  income 

to   the  stockholder 134 

Indebtedness — Compromise  of 150 

— Interest  accrued  and  paid  on.  .150 

— Shares  without  par  value: 
Computation  of  deductible  in- 
terest on  indebtedness 154 

— Bonded  and  other 151 

Inheritance — Taxes  

— Taxes  not  deductible 151 

Initials — Use  of  authorized 151 

Insurance — Accident     151 

—Life    151 

— Life  and  fire   premiums 151 

— Life  insurance  carried  by  part- 
nership on  lives  of  individual 
members  151 

— Gross  income  of  insurance 
companies  148 

— Mutual  flre  insurance  com- 
panies   151 

— Proceeds  of  life  insurance  in 
favor  of  corporations 123 

— Life  insurance  in  favor  of 
corporations  " 123 

— Reserve  for  insurance  not  de- 
ductible   124 

— Foreign    assessments 93 

— Supplementary  statements  by.116 
Insurance  Companies — Reserve  de- 
ductible  by 125 

Interest — Payments  on  commercial 
paper  of  corporations 153 

— Notes   for   interest 153 

— Coupon  interest,  accruing  prior 
to  incidents  of  tax 153 

— On  collateral  subjept  to  sale 
or  hypothecation  in  business.  .105 

— On  bonds  of  exempt  organiza- 
tions   153 

— On  bonds  bearing  tax  free  cov- 
enants   153 

— Which  constitutes  an  allow- 
able deductions 122 

— On  bonded  indebtedness  or 
other  indebtedness  bearing 
rates  of  interest 151 

— Shares  without  par  value: 
computation  of  deductible  in- 
terest on  indebtedness 154 

— Corporations  foreign  interest 
accrued  and  paid  on  indebted- 
ness   115 


— On  government,  etc.,  bonds 
credited  to  partnership  is  de- 
ductible even  though  bonds 
are  deposits  as  collateral  for 
loan,  the  interest  paid  on 
which  is  deductible  as  part- 
nership expense  154 

— Judgment  paid  for  infringe- 
ment of  trade  name  and 
amount  paid  in  satisfaction  of 
suit  for  interest  on  the  judg- 
ment   154 

— Received  and  paid  by  brokers 
in  connection  with  purchase 
and  purchase  and  carrying  of 
securities  for  customers 154 

— On  bank  'deposits  in  United 
States  to  credit  of  non-alien 
individuals  or  corporations 
having  154 

— On  bonds,  dividends,  accruing 
to  aliens 85 

— Accrued  on  bonds  at  time  of 
sale  or  purchase .'....155 

— Bonds  purchased  with  ac- 
crued   155 

— On  bank  deposits 95 

— On  bank  accounts 95 

— On    United    States    bonds    or 
bonds    of    state    or    political 
subdivision,  is  exempt 135 

— Coupon,  accruing  prior  to  in- 
cidence of  tax 155 

Inventory — Materials  and  mer- 
chandise   155 

Investments — Liability  on  foreign, 
computed  on  rates  of  exchange 
at  time  it  was  credited 155 


Joint  Ownership — Joint  owners  of 
rented  property  who  do  not 
desire  to  claim  exemption  al- 
lowed by  paragraph  (c)  of 
income  war  tax 155 

Judgments — Paid  for  infringe- 
ment of  trade  name  and 
amount  paid  in  satisfaction  of 
suit  for  interest  on  the  judg- 
ment   154 


Landlord — and  tenant 156 

Leases — Record   of 156 

Lessee— Liability  of,  under  terms 
of  lease  to  pay  tax  on  rentals 

received  by  lessor 156 

Legacies 156 

Liberty  Bonds — Application  of  ex- 
emption when  several  mem- 
bers of  the  faculty  invest  in 
new  liberty  bonds 156 


188 


INDEX 


— Application  of  income  and  ex- 
cess profit  taxes  to  liberty 
bonds  issued  or  to  be  issued 
under  the  act  of  September 
21,  1917 15fr 

— Required  before  undertaking 
collection  of  foreign  items. . .  .156 

— Application  for  collection  of 
foreign  items  156 

— Licensees  to  keep  record  of 
all  transactions  157 

— Issued  without  bond 97 

— Required  for  branch  offices: 
of  collecting  agents 84 

— For  branch  office  to  be  is- 
sued by  collector  of  district 
where  branch  is  located 157 

— For  collection  of  foreign  items 

in  deducting  tax 157 

Licensee — Procedure  by,  when  true 
owner  is  unknown  to  nominal 
stockholders  157 

— Return  monthly  by  licensee.  .157 
Limitations — No    three-year    limi- 
tation to  right  of  government 
to    collect    taxes    by    suit    or 
otherwise     106 

— Waiver  of  three-year 107 

Liquidation — Corporation,  liquidat- 
ing during  the  year 112 

List  Ketnrns — Monthly  list  re- 
turns need  not  be  sworn  to..  158 

— Substitute  certificates  entered 
on  monthly  list  returns. ....  .103 

— Annual  list  returns  of  with- 
holding agents  83 

— Annual  list  returns  must  be 
filed  on  or  before  first  day  of 
March  of  each  calendar  yar..!58 
List  Returns — Annual  list  returns 
by  licensee  for  foreign  collec- 
tions   158 

tive  Stock — Cost  of 

Lobbying- — Expenses    of 158 

Local  Benefit! — Taxes  assessed 
against  local  benefits 158 

— Special  assessments   92 

— Deductible  by  citizens  or  resi- 
dents injured  outside  of  busi- 
ness   125 

— Deductible  loss,  method  of  de- 
termining amount  of 125 

— Sustained  by  partnerships. . .  .158 


Market    Price — Property    acquired 

prior  to  March  1st,  1913 158 

— Property  acquired  subsequent 

to  March  1st,  1913 164 

Materials — Prorating    charges    for 

materials  used  and  on  hand..  155 
— And     merchandise,     inventory 
of    .  ..155 


Mining — Individuals  and  corpora- 
tions may  compute  depletion 
deductions  from  gross  income 
on  the  basis  of  the  fair  mar- 
ket value  of  the  mine  contents 
as  of  March  1st,  1913,  if  prop- 
erty was  acquired  prior  to  that 
date,  or  on  bases  of  cost  if 
acquired  subsequent  to  that 
day  158 

Minor — Income  accruing  to  minor 
through  natural  guardian.  ..  .158 

— H— 

Names — Married      women      should 

use   Christian    names 158 

Notes — Promissory  notes  of  cor- 
porations   110 

— Equipment  trust  notes 159 

Notice — Return  not  filed,  notice 
is  sent  to  delinquent  by  col- 
lector   159 

— Of  assessment,  demand  no- 
tice of  penalty  and  interest. . .  93 

— Of  assessment  may  lawfully 
be  given  by  mail 92 

— Of  failure  to  make  return...  159 

— Of  appointment  of  paying 
agent  83 

— Tax  withheld  at  source  not  to 
be  forwarded  to  collectors  un- 
til notice  of  assessment  has 
been  received 159 


Oblig-atioi 

— United  States,  state  or  polit- 
ical subdivision,  exempt 139 

Organizations — 

— Agricultural    84 

— Co-operative  dairies   84 

Ownership  Certificates    104 

— Aliens,  non-resident,  shall  ac- 
company coupons,  etc 87 

— Alien,  non-resident,  may  be 
printed  in  two  languages 87 

— Non-resident  aliens,  special 
exemptions  may  not  be 
claimed  at  the  Source  by 87 

— When   not   attached..  ..159 


Partnership     161 

— Profits  of  limited 159 

— Bank  owned  by  individual  or 
— (Limited),  held  to  be  corpora- 
tions        95 

— Members  liable  in   their  indi- 
vidual  capacity    159 

— Private  banks  as 95 

— Life  insurance  carried  by,  on 
lives  of  individual  members. .  .151 


INDEX 


189 


— Employee  of  a,  under  partici- 
pation of  profit  agreement. .  .159 

— Profits  earned  prior  to  march 
1st,  1913,  for  fiscal  year  end- 
ing subsequent  thereto 159 

— Profits  of,  taxable  to  mem- 
bers thereof 160 

— Partners  should  return  their 
respective  interests  in  firm's 
accounts  receivable  160 

— Losses    sustained   by 158 

— Income  accrued  to  individual. 

— Profits,  undivided  annual,  of.. 160 

— Returns  may  be  required  of.  160 

— Must  file  certificates  estab- 
lishing- their  identity 160 

— Tax  deductible  at  source  on 
interest  from  domestic  obliga- 
tions accruing  to  non-resident 
alien 87 

— Foreign,  having  place  of  busi- 
ness in  the  United  States  must 
file  certificate  of  ownership  to 
prevent  deduction  at  source  on 
interest  on  corporate  bonds, 
etc 104 

— Foreign,  owning  stock  of  do- 
mestic corporations  but  not 
record  owners  thereof . .  .160 

— Profits  accruing  to  non-resi- 
dent alien,  on  sale  of  stock 
negotiated  through  domestic 
bankers 160 

— Partnerships   161 

— Withholding  from  partnership 
salaries  and  drawing  ac- 
counts   161 

Patents — Depreciation   of 131 

— Computation    of    depreciation 

of    132 

Payments 161 

— Money  due  for  professional 
services  161 

— Certified  checks   161 

— Certified  checks  and  other 
forms  161 

— Tax,  when  it  must  be  paid  by 
corporation  when  return  has 
been  made  by  commissioner  of 
internal  revenue 161 

— Of  taxes,  penalty  for  delay. .  .162 

— Receipts  for  taxes  paid 162 

— Computation  of  income  tax  on, 
received  on  contract  to  sell 
real  estate  on  the  installment 
plan  in  cases  where  title  is 
not  transferred  until  final  pay- 
ment is  made 162 

Penalty     163 

— For  failure  to  make  return 
or  falsifying  same 162 


— Notice  of  assessment,  demand 

notice  of,  and  interest 93 

Penalties — For  delay  in  payment  of 

— For  delay  in  payment  of 
taxes  162 

— Corporations 

— Individuals    163 

— Penalty  for  failure  to  make 
return  by  withholding  agents 
at  proper  time .163 

— Avoiding  the  50  per  cent  and 
specific  for  failure  to  file  re- 
turn on  time  by  subsequently 
filing  within  notice  from  col- 
lector applying  the  act  of 
September  8th,  1916 163 

— Claim  for  abatement  stays  5 
per  cent  until  claim  is  re- 
jected   163 

— Suit  to  enjoin  collection  of...  163 
Pensions 163 

— Foreign 163 

— For    ex-employees 123 

Permanent     improvements  —  Made 
under   contract  in   addition   to 

rentals 163 

Policies — Dividends,  life  insurance 

policies    137 

Power  of  attorney — Fiduciary  can- 
not be  created  by 164 

Premiums — Fidelity  bond  premium 
on   97 

— Insurance,  life  and  fire 151 

Products — Manufactured,  cost  of.  .164 

— Manufactured,  cost  of 164 

Fronts — Partnerships,  of  limited.  .159 

— From  sale  of  other  disposi- 
tion of  capital  assets .164 

— Realized  by  individuals  or  cor- 
porations from  sale  of  real 
estate  164 

— Computing,  when  various  par- 
cels of  stock  of  the  same  is- 
sue are  bought  and  sold  at 
different  dates  164 

— Proceeds  of  sale  of  rights  to 
subscribed  stock 146 

— Employee  of  a  partnership  un- 
der participation  of  profit 
agreement  159 

— Partnership  profits  earned 
prior  to  March  1st,  1913,  for 
fiscal  year  ending  subsequent 
thereto 159 

— Of  partnership  taxable  to 
members  thereof 160 

— Undivided  annual,  of  partner- 
ships   160 

— From  sale  of  disposition  of 
capital  assets 101 

— From  sale  of  real  estate 165 


190 


INDEX 


Property — Appraised  value  of  prop- 
erty at  time  of  death  of  owner, 
if  subsequent  to  March  1st, 
1913,  the  basis  for  determining 
gain  or  loss  on  subsequent  dis- 
position   164 

— Permanent  improvements  made 
under  rental  or  leased  con- 
tracts   145 

Froration    139 

— Exemption  may  be  prorated 
between  husband  and  wife...  139 

Public  Utilities 

— Public  utilities  under  con- 
tract with  state,  etc 164 

— Public  utilities,  corporations 
excise  tax — act  of  August  5th, 
1909  164 

Purchase  and  Sale — Bonds,  pur- 
chased and  sale  of  between 
interest  periods 98 


Railroads    

— Deductible  and  non-deducti- 
ble expenses  of 123 

Real  Estate — Profit  from  sale  of .  .165 

— Losses  from  sale  of  other  dis- 
position   165 

— Depreciation  of  and  buildings 

thereon    131 

Receipt — Personal  by  collectors. .  .165 
Receiver — Receivers   165 

— Receivers,  trustees  in  bank- 
ruptcy, to  make  returns  and 
pay  tax  for  corporations  whose 
property  or  business  they  are 
managing 165 

— For  an  individual  to  make  re- 
turn and  pay  tax 166 

— Liability  of  in  partition  pro- 
ceedings   166 

Record  Owners  —  Stock,  record 
owner  not  to  make  return  and 
pay  tax  for  non-resident  alien 
actual  owner  of  partnership..  88 

— Record  owners  of  stock,  duty 
of,  when  other  than  actual 

owner    166 

Recovery  of  Tax — Suit  against 
collector  to  recover  by  a  cor- 
poration incorporated  to  pro- 
vide and  operate  railroad 

terminal    166 

Refunds — Responsibility  of  with- 
holding agent  for,  when  form 
is  filed 167 

— Claims  for  and  abatement  of 
taxes  167 

— Or  abatement  of  taxes,  forms 
to  be  used 81 


— Claims  for  the  excess  amount 
withheld  at  source 

— Limitation  on  claims  for 105 

— Defendent  in  suit  to  recover 
back  taxes  105 

— Statute  of  limitations,  bar  re- 
moved from  certain  claims  for 
refunds  105 

— To  non-resident  alien  at  end 
of  year  of  amounts  in  excess 
of  liability  withheld  at  source 

during  the  year 89 

Reimbursements — Of  expenses  in- 
cident to  an  accident 167 

Rents — Rent    167 

— Joint  owners  of  rented  prop- 
erty   

— Rentals  and  royalties 168 

Repairs — Additions  and  better- 
ments made  by  tenant  corpora- 
tions    82 

Reserves — For  losses  not  deducti- 
.      ble    168 

— Fund  for  depreciation,  invest- 
ing of  131 

— Reserves 124 

— For  taxes  are  not  deductible. 
Returns — Aliens,  returns  and  pay- 
ment of  tax  by  non-resident..   85 

— In  payment  of  tax  by  agents 
or  representatives  86 

— Aliens,  non-resident,  returns 
and  payment  of  tax  on  income 
from  domestic  corporations...  86 

— Tax  liability  on  foreign  in- 
vestments computed  on  rates 
of  exchange  at  time  it  was 
credited 155 

— Annual  return,  when  and  by 
whom  to  be  filed 168 

— Should  be  made  by  principal 
rather  than  attorney  in  fact.  168 

— May  be  required  though  no 
tax  due 168 

— Not  filed,  notice  is  sent  to 
delinquent  by  collector 159 

— Extension  of  time  for  filing 
return  or  falsifying  same....  162 

— Where  to  be  filed   168 

— Erroneous,  correction  by  tax- 
payer   168 

— Penalty  for  failure  to  make 
return  or  falsifying1  same... 

— Assessment  and  payment  of 
tax,  amended  return  not  re- 
quired when  audit  reveals 
necessity  for  further  tax 92 

— Profits  of  partnership  taxable 
to  members  thereof  in  per- 
sonal return  of  each  partners 

— Extension  of  time  of  return 
because  of  absence  in  foreign 
country  142 


INDEX 


191 


— Returns  may  be  required  of 
partnerships  160 

— Monthly  list  returns  to  be  ac- 
companied by  exemption  cer- 
tificate   169 

— Of  undistributed  income 147 

— Of  income  accruing  to  trust 
estate 141 

— Must  be  signed  and  sworn  to.  169 

— Annual  list,  should  be  made 
by  withholding  agent 83 

— Not  required,  if  exemptions 
and  deductions  equal  pay- 
ments   169 

— Stock  record  owner  make  re- 
turn and  pay  tax 169 

— Stock  record  owner  not  to 
make  return  and  pay  tax  for 
non-resident  alien  actual  own- 
er of  partnership 88 

— Returns  and  payments  of 
taxes  for  non-resident  alien 
corporations  receiving  income 
from  domestic  corporate  obli- 
gations through  representa- 
tive in  the  United  States 

— To  be  filed  monthly  by  with- 
holding agents 169 

— Monthly  returns  to  constitute 
part  of  annual  returns 

— Monthly  return  to  be  filed  by 
withholding  agents  receiving 
coupons  without  certificates.  .169 

— Monthly  list  returns,  form 
1044  revised  used  for 143 

— Monthly  by  licensee 157 

— Corporation,  unless  specific- 
ally exempt  shall  file  return.. Ill 

— Notice  to  corporations,  if  re- 
turn is  not  filed  on  time 115 

— Extension  of  time  in  which  to 
file  return 142 

— Extension  of  time  in  making 
returns  of  corporations,  for- 
eign and  domestic,  doing  busi- 
ness in  foreign  countries 115 

— Date  for  filing  return 169 

— Sundays  and  legal   holidays.  .170 

— By  corporations  must  be  made 
on  specified  form 116 

— Form  to  be  used  in  making 
corporation  returns '.116 

— Supplementary  statements  on, 
by  corporations  116 

— Supplementary  statements  by 
insurance  companies 116 

— Of  domestic  corporations 
whose  books  are  kept  abroad.  99 

— Corporations  doing  business  in 
the  Philippines  and  Porto 
Rico,  file  returns 117 

— Correction   of    .  ..170 


— Verification  of  by  commis- 
sioner of  internal  revenue. ..  .170 

— Constitute  public  records  and 
are  open  to  inspection  under 
certain  restrictions  170 

— Made  by  commissioner  of  in- 
ternal revenue  170 

— Of  income,  secrecy  of  infor- 
mation contained  therein. .. .170 

— Notice  to  delinquent  to  make 
within  ten  days 170 

— Extension  of  time  to  make  an- 
nual return  by  corporations. . .170 

— Should  be  made  of  aggregate 
of  taxable  income  including 
dividends  payable  to  a  bene- 
ficiary, in  excess  of  $3,000 147 

— Corporations  keeping  books  in 
accordance  with  standard  sys- 
tems of  accounting  make  their 
returns  on  basis  on  which 
their  books  are  kept,  provided 
the  books  so  kept  and  returns 
made  reflect  the  trust  net  in- 
come of  the  corporation  of 
each  year  99 

— Verification  of  by  individuals 
in  the  naval  and  military  es- 
tablishments of  the  United 
States  at  home  or  abroad  in 
certain  cases 171 

— Extension  of  time  filing  in- 
come tax  returns  by  corpora- 
tions making  returns  on  fiscal 

year  basis    118 

Royalties    171 

— Rental  and 168 

— Royalties    168 

— Royalties  from  mines 171 

— Received  from  lessees  are  in- 
come . 


Salaries — and    bonuses,    tax   with- 
held       98 

— Of  officers  and  employers. ..  .171 
— Paid  officers  or  employees. ..  .123 
— Paid    to    national    guardsmen 
while  on  federal  duty  are  an 

allowable    expense    123 

Separate    Maintainance — Fund     to 

wife 171 

Shares — Of  beneficiarie,  names,  ad- 
dresses upon 171 

Signatures — Facsimile,    bank    and 

trust  companies  may  use 172 

— Facsimile     may    be    used    by 

collecting  agent  in  signing. .  .172 
Societies — Operating      under      the 
lodge  system    172 


Source 


.172 


192 


INDEX 


Steamship  Companies — Foreign  ex- 
penses of  108 

— Foreign,  taxable  income  of...  108 
Stock — Assessments  on 92 

— Owned  by  non-resident  alien 
corporations  or  firm  reported 
in  name  of  citizen  or  resident 
of  the  United  States 88 

— Record  owners  make  return 
and  pay  tax 88 

— Record  owner  not  to  make  re- 
turn and  pay  tax  for  non-resi- 
dent alien  actual  owner  of  the 
partnership  88 

— Dividends  held  to  be  income..  134 
Stockholders — Licensee    procedure 
when  true  owner  is  unknown 
to    nominal    stockholder 157 

— Dividends  received  by  stock- 
holder from  1913 134 

Subsidiaries — Corporation    Ill 

— Dividends   received   from 138 

— Dividends    declared    and    paid 
by  subsidiary  taxable  to  par- 
ent corporation  when  received.133 
Suit — To  enjoin  collection  of  pen- 
alties      163 

— For  recovery  of  taxes  errone- 
ously or  illegally  assessed  can 
be  brought  against  the  col- 
lector only  who  collected  the 
taxes,  and  not  his  successor. .166 
Sur  Tax — Additional  tax,  aliens, 

non-residents    85 

— Fiduciaries  are  subject  to  the 
payment  of  additional  tax 
upon  incomes  received  for  the 
benefit  of  their  principles. ..  .142 
Swearing' — Monthly  list  returns 
need  not  be  sworn  to 158 

— T— 

Taxes — Suit  for  recovery  of  taxes 
erroneously  or  illegally  as- 
sessed can  be  brought  against 
the  collector  only  who  col- 
lected the  taxes,  and  not  his 

successor    166 

— Overpayment  at  source 172 

— Taxes  paid  by  a  tenant 172 

— Assessed  against  local  bene- 
fits    92 

— Income  tax   146 

— Paid  by  banks   on   stock  held 

by  individuals    146 

— Paid  during  the  year  are  de- 
ductible   124 

— Excise  and  franchise  taxes  are 

deductible    124 

— Reserves  for  taxes  are  not  de- 
ductible   124 

— Not  deductible   .  ..125 


Tax  Deductions  —  Certificates  of 
ownership  not  filed,  first  bank, 
etc.,  receiving  coupons  for  col- 
lection, deducts  tax,  using  its 
own  certificate  105 

Tax  Free  Clause— 

— Bonds  containing  tax  free 
covenant  clause  173 

Taxability — Of  income  accruing  to 

decedent    dying   after    March    1, 

1913,    but    before    October    3, 

1913     120 

— Of  stock  dividends  resulting 
from  a  capitalization  of  sur- 
plus earned  prior  to  January 
1,  1913.  Stock  dividends  held 
to  be  income  134 

Tax  Withholding' — Tax  not  to  be 
withheld  at  source  173 

Tenant — Taxes  paid  by 172 

— Liability  of  tenant  under  cov- 
enant in  lease  to  pay  all  taxes 

on  property  173 

— Tenant  and  landlord 156 

Trust  Companies — Banks,  bankers  95 

Trustees— Compensation  for  serv- 
ices as  trustees  173 

— Receivers,  trustees  in  bank- 
ruptcy, to  make  returns  and 
pay  tax  for  corporations 
whose  business  they  are  man- 
aging   165 

— V — 

Valuation — 

— At  which  stock  is  carried  on 
the  books  of  the  owner  is  not 
conclusive  evidence  of  its 
actual  value  82 

— W— 

Widows — Required    to    file    return 

on  Form  1040   173 

Withholding — Tax  withheld,  when 

to  be  paid    174 

— Agent  required  to  file  return.  169 
— Tax  previously  withheld   may 
be  paid  creditor  on  filing  cer- 
tificate  of  exemption    in    case 
of      interest      on      registered 

bonds     98 

— Tax  withheld  at  source  not  to 
be  forwarded  to  collectors  un- 
til notice  of  assessment  has 
been  received  159 

— Y— 

Year — Calendar    100 

—Fiscal    174 


UC  SOUTHERN  REGIONAL  UBRARY  FACILITY 


